option ARM's - buyer beware
 

the recent BW article about this spells it out.

however, i'd like to add that the people featured in the article deserve what the got (or will be getting , or will be losing) for being IDIOTS to think that a 2.2% mortgage is realistic. the young couple from wisconsin has got the 'clueless' look down pat. bravo!

sorry, i just had to vent. seeing financial illiteracy just really gets me.

The average person is a moron.

"A person is smart. People are stupid." - Men In Black

I never quite understood why an average Joe would want an ARM. It makes sense in some unique situations, but they way they farm them out makes me think that a lot of people don't understand what they're getting themselves into.

And the average moron is a person. :D

BTW, I do agree about ARMs.

When the chickens finally come home to roost, there will be a lot of property out there available for next to nothing.

That's an easy answer.

The average Joe can purchase a $500K house with a $75K income.

I know folks who have diligent brokers. They jump from teaser ARM to teaser ARM every 6-24 months. They build equity quickly by keeping 6-7% payments and the brokers rake in commissions. These are folks who could pay off their mortgages with the loose change in their ashtray so the risk is inconsequential.

I'm not big on regulation but something has to be done because I don't want to pay for the free ride of those who think they're on a free ride.

Sixto
93 300SD

ARM's can be good in a situation where rates are falling. However they seem to be getting used lately as a means to get the lowest monthly payment, and there for be able to afford more house than otherwise could be. This will lead people into trouble because interest rates are going up, and probably will for the next couple of years.

Interest only mortgage's are anothing poor idea, don't get me going.

All these different loan types do have there place, investors and people with higher financial intelligence can use them to there advantage. However for the average person looking to buy a house, a fixed rate IMHO is currantly the best way to go. Interest rates are still not bad.


What is currantly affecting a lot of people are those 80/20 loans. Try moving in 2 years if all of a sudden your house drops $50,000 in value. In some cases these people simply cannot move. Again though, if one is young and plans on staying in said house for quite a while, like 5-10 years, such a loan is not a bad idea.

My boss's boss is on an interest-only loan...he gets transferred every 2.5-3 years so he doesn't pay much principal anyway, he has always counted on appreciation of the property to build equity for him. I wonder how that's going to work if property values stall in the next year or more, or God forbid, values fall.

I'm in my 6th year of what was a 3 year ARM, and its been fine. The only thing that jacked me was my property taxes went up like crazy. My interest rate is still very low. I'm still going to refi soon, though, maybe even with the bank my loan is with already.

I agree that many use it to buy more than they can afford. I didn't, my house is small, perfect for me. There has been good, average appreciation here, but I won't be selling anytime soon. Many people have sold on my block since I've been here, and they all seem to ask way more than the house is worth. One has been sitting for over almost a year.

There have been a lot of stories about people in financial crisis due to ARM's in the local paper and on the local news. Foreclosures in Denver are have increased substantially this year. I'm constantly asking myself what the people were thinking?

They were thinking "All I have to do is sign for this house and dont need to come up with a damage deposit"

There is a BIG difference between the Option ARM and ARM's the rest of you think you are talking about. Pricing for ARM's are now inverted so its a useless subject.

I do agree that ARM'S are risky but they do have their place and if structured properly can be a solid way to structure monthly cash flow.

Well when we bought this house, 18 years ago, we used an ARM. Rates were low teens.
I'm no idiot, so not everyone who takes out ARMs are idiots. Don't worry I didn't take offense, just had to say this.

I did a ton of calculation (before the days of a spreadsheet), I ended up calculating for 8 +/- different Mtgs. Fixed with various Down payments and fees, ARMs with similiar.

What I actually figured out was that with a couple of reasonable assumptions, interest rates were pretty voilatile back then too, if you held the mtg for 5 years the "True" cost diff was about $ 500 from the best to the worst.
I took into account taxes, Big DP vs small DP, Higher rate with no points, lower rate with points, fixed and variable.

Fortunately for us after the first or second adjustment, which were minor and I think the second actually dropped the rate, general rates had come down enough allowing us to refi at a still lower fixed.

We have refi'd twice since, once to cover a large addition (can u say HUGE worksop garage for me, HUGE HUGE master suite for the better half).

And then a second time to get a nice low rate, now though the mtg is so small most lenders are only interested if we bump it up and take out a ton of cash. No way.

Although it might fix one problem bugging me. Over 2/3 of our mtg payment is Real Estate taxes. Without looking I am pretty sure my montly RE taxes today are greater than the entire monthly payment when we moved in.

Finally, with the exception of a VERY small number of applicants. Option ARMs, Interest Only, Neg Amort, 0% down etc are a scam by the industry that may come back and burn all of us as the fed bails out the bank, Fannie Mae etc as they go bad.