I'm sure many of you are well aware of this program by now. The Option ARM also known as Pick a Payment gives you the option of choosing between one of four different types of payments every month. They are as follows:

1. Minimum Payment (Negative Amortization)
2. Interest Only Amortized over 30 years
3. Principal and Interest Amortized over 30 years
4. Principal and Interest Amortized over 15 years.

The Negative Amortization option basically put is like making a minimum payment on a credit card. Not only do you get no where, you fall behind. Lenders typically only allow you to make a minimum payment (normally 1-2%) for about 3 years. They then recast the loan so you can make up for the lost money. After this period, the interest rate sky rockets and shows its ugly side.

Used wisely, this can be an excellent program for specific groups of people.

1. Investors who are planning to keep the house for 2 years can actually get a positive cash flow with the minimum payment option. The equity you lose (negative amortization does this) on a 200k house on the course of 3 years is about $9,000. If you bought a house and kept it for 3 years with out it appreciating more than 9k then you made a serious mistake.

2. Rehabbers who plan to keep a house for a limited time can use this program.


You should not use an Option ARM if:

1. If you cant afford to make at least Interest Only payments on an Option ARM you shouldn't use this product. Unfortunately our culture rewards spending and we always find reasons to spend more on other things and end up choosing the minimum payment on the Option ARM anyways.

2. People who decide to live in a home for long term should definitely pass up on this deal. The loan recasts after 3 years and your screwed unless you drop another 3% in closing costs to refinance again.

3. Do not get this product if you plan on making payments on options 2 and 3 but want to have the neg am just in case. Like I said two paragraphs ago, we have a bad habit of finding reasons to go with the minimum payment anyways.

Finally one thing some of you more Naive Realtors should notice is that some banks offer a lot of points to brokers who offer this product. They give anywhere up to 3% (actually heard 4% now too) for closing these deals as Yield Spread Premium. Unfortunately a many newbie loan officers think that this is an awesome way to make money and ruin their reputation several months down the road when the MTA keeps going up which it has been for over 2 years now.

So now you know when you hear the word "Option ARM" be a bit more careful and hesitant of using this product. Like I said, it can be great or it can ruin you

__________________
Ali Mirdamadi
Branch Manager
Royal Financial LLC

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