With the record number of defaults and foreclosures occurring in today’s market, many homeowners have been led to believe that Option ARMs are bad loan products. The truth is that Option ARMs are great choices for some borrowers, but very dangerous choices for others. Whether they’re helpful and harmful depends primarily on whether they’re suitable for the borrower’s individual situation.
On the one hand, Option ARMs can be a great way to take further control of your finances. They offer a flexibility of payment choices that enables the borrower to utilize funds in a way that suits his or her financial objectives. On the other hand, when these loan programs are provided to borrowers who haven’t been properly educated or borrowers who otherwise couldn’t qualify for a mortgage, they can quickly lead to disaster.
If you’re considering an Option ARM or if your Mortgage Planner suggests that you consider one, make sure 
you understand how they work. Lack of education is one of the primary reasons that numerous homeowners have gotten into trouble with these loans. Know that two payment options will not pay down the principal balance. With the minimum payment option, the interest that’s not covered by the monthly payment will actually be added on to the principal balance, which will recast (readjust to accommodate the growing principal balance) after a specified period of time, usually five years or sooner, unless the accumulated interest is paid. The interest-only option will cover the interest payments, but not the principal.
Reputable Mortgage Planners always take the time to determine whether these products are suitable and appropriate for their borrower’s individual financial capacity and goals. Your Mortgage Planner should conduct an in-depth evaluation of your financial situation before recommending any loan product. Especially with Option ARMs, your Mortgage Planner should provide a clear explanation of how the loan works.
These products should never be used to put people into a higher priced house than they can truly afford. Instead, the borrower should be capable of making the fully-indexed (principal and interest) payment. Positioned properly, Option ARMs can be an incredible wealth-building tool that can help set homeowners on a faster and safer path to achieving their financial goals.
Consult your Mortgage Planner today for more information on whether an Option ARM is the best or worst choice for achieving your financial goals.