The Option Arm Mortgage was the latest craze (last year). It allowed a borrower to have a huge mortgage and make the tiniest of payments. Those are the ads you see that say borrow $1,000,000 and make a payment of $995 a month. Sounds good? Very very silly….and very abused.

     The mortgage was based on 4 different types of payments the lowest being a payment based on a phantom rate for the first 12 months, the highest paying the principal and interest based on the real rate. Therefore, the interest rate would be sold as 1% and the real rate could be as high as 9%. All monies that were due and not paid were tacked onto the backend of the mortgage amount. This is known as a negative amortization mortgage. The sad thing was people were buying the payment and not the real cost. Sounds like they got this concept from the car lease!

Since this is causing problems for borrowers now (surprise), the lenders have a new scheme.

The 5/1 LIBOR ARM product. Same concept but the interest rate is locked for 5 years. This loan is being sold as “offering the stability of a fixed rate mortgage as well as the flexibility of a multiple payment option”. Same deal… just dragging out the pain for a longer amount of time. More on this loan type and why you should not it tomorrow………

– Dale Siegel