| Definition. An Option ARM mortgage loan is a | | | | foreclosures running 30% ahead of 2006 figures, most |
| "Negative Amortization Mortgage," which means that if | | | | mortgage defaults are attributed to these individuals. |
| the borrower only pays the minimum payment each | | | | These borrowers took on traditional (non-Option ARM) |
| month, the principal will build. By definition, a negative | | | | high loan-to-value (LTV) loans with high rates just to |
| amortization mortgage is one, which has a low monthly | | | | get into their home or investment property. |
| payment that does not fully cover the accrued interest | | | | Market Devaluation. In California and Florida, property |
| each month. Since the interest is not being fully paid, | | | | values have dropped more than the rest of the |
| the difference between what is paid and the interest | | | | country; real estate equity is running low, or is even |
| accruing is added to the balance of the loan. | | | | negative meaning that the mortgages are greater than |
| If only the minimum payment is paid, after 3 year or so, | | | | the property value. These property owners that |
| the loan will recast, which means that the outstanding | | | | originally obtained 80% to 100% financing, are now |
| balance will amortize over the remaining 27 years | | | | sitting at loan-to-values of 100% to 120% based on |
| (37-years in the case of the 40-year loan), and the | | | | current values. Consequently, they are unable to |
| payments will double possibly triple versus the minimum | | | | refinance into an Option ARM loan to reduce their |
| payment the borrower has been enjoying. Just before | | | | payments to something manageable and are stuck |
| the point of recast, the borrower has a few choices, | | | | with a mortgage payment they cannot afford. They |
| namely: 1) cough up some cash to pay down the | | | | should have either, 1) not bought the home, 2) |
| balance that has been building, 2) take on the big | | | | purchased a home they could afford (based on the |
| payments, or 3) refinance into another Option ARM to | | | | 30-year fully amortized payment), or 3) waited until |
| get another 3-years of low payments. Option 1 and 2 | | | | they 10-20% to put down. |
| may not be feasible for most borrowers. Option 3, | | | | Education. Loan officers and brokers have an |
| refinancing, may be possible if the borrower has | | | | obligation to educate their borrowers to help them |
| maintained good credit since last refinance (or | | | | minimize the chance of future problems. Borrowers, |
| purchase loan) and market values have not dropped. | | | | like many uninformed article writers, blame the Option |
| Poor Spending Habits. Folks that refinance every few | | | | ARM Loan when in fact they should blame their loan |
| years to pay off their maxed out credit cards will fail | | | | officer for not educating them. Certainly, loan officers |
| (no matter what type of mortgage they obtain) when | | | | and brokers in the business cannot be expected to |
| the market values soften and the equity is not | | | | know where interest rates are going, otherwise, they |
| available to tap. Refinancing to correct poor spending | | | | would be not be loan officers and brokers; they would |
| habits is seldom a long-term solution unless the | | | | be trading interest rate futures and making the big |
| borrower truely changes their spending habits. With | | | | bucks! |