Much is being written, and will doubtless continue to be written, on the credit market crash and its far-reaching effects on our economy, especially on the mortgage market. And while it hasn’t happened yet, the next casualty could very well be the Option ARM. This is only starting to be a problem, since these aren’t always considered subprime loans.
What is an option ARM?
The option ARM is an adjustable rate mortgage with “options.” You can choose whether to pay on the principal. You can even choose how much of the interest to pay. Which means you can get a very low house payment. At first anyway. As with all such home mortgage loans, the introductory period ends and you eventually have to start paying on the principal (and the interest you have been putting off). This means that you mortgage payment goes up quite dramatically.
The option ARM is basically another way for someone to “afford” a home that would be otherwise unaffordable. This is, of course, why the whole subprime lending crash thing is happening in the first place. And the option ARM could be the next thing to go. All of the problems associated with these “creative” home mortgage financing solutions is why I am fond of the boring fixed rate loan rather than the adjustable rate mortgage in any form.
Here is a video on YouTube that illustrates the point.