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Option ARMThe Otion ARM is one of the most misunderstood loans in the market. The Option ARM is also one of the best loans available for borrowers who are looking for a loan that will allow for multiple payment options and the ability to control their cash flow each month. The misunderstandings on the Option ARM ususally come from loan officers that do not know how the loan works, do not know how to explain the loan, and or, loan officers that do not explain the loan adequatley so that they can profit from your lack of information about the loan. Unfortunately the latter is usually the case and a loan officer takes advantage of the borrower by not fully disclosing all of the facts about the loan. The Option ARM is a great loan for the right borrower in the right situation but you must have all of the facts about the loan to make a good financial decision. Do not be fooled by low start rates! The KEY to this loan is the MARGIN that you will pay above the MTA index for as long as you keep this loan. The start rate is generally good for 1 month and is only used to set the MINIMUM PAYMENT OPTION. The MARGIN on this loan will determine your interest rate after the first month so the margin is critically important. The margin is where loan officers can easily take advantage of consumers that do not fully understand this loan product. The amount of the margin is also how ALL lenders or brokers are compensated, so consequently your best interest and the interest of the loan officer/lender are at odds and this is why it is important that you understand how this loan works. You must ask the lender these questions, "what is my MARGIN"... "What are my points at that margin"..."does this loan with that margin have a PREPAYMENT PENALTY?" The MARGIN is just what it sounds like the PROFIT MARGIN. The lender makes their profit based on the (profit) margin above the index. The loan officer makes his or her profit (REBATE) from the lender based on how high the margin is. The higher the margin, normally the higher the rebate the broker is receiving. In additon you may also be charged origination points which is another way lenders and brokers profit. So to recap...your goal is to get the LOWEST POSSIBLE MARGIN with either no prepayment penalty or the shortest prepayment penalty availabe at the best margin. Prepayment penalties should allow you to get a better margin from the lender...but not always...prepayment peanlties are also used by loan officers to make more rebate and still give you a high margin. Our suggestion, and what we do for all of our clients is to show you different scenarios with different Margins with no prepayment penatly, a 1 yr prepayment penatly, or a 3 year prepayment penalty. This type of comparison will alow you to make an intelligent decision about your financial future. CALL US! Once you make a decision on a loan you must get THE MARGIN and THE PREPAYMENT IN WRITING AT THE TIME OF APPLICATION. If a lender is not willing to put this in writing or they hedge, or they tell you they cannot until the loan is approved then do not do business with them. The only exception is that margins can be adjusted by credit score but the broker or lender should know your credit score the day they take your appliction and based on that information they should be able to give you a margin in writing and whether or not that margin has a prepayemnt penalty and what the total closing costs will be for that loan. DO NOT APPLY FOR AN OPTION ARM UNLESS the lender is willing to give you all of this in writing otherwise it is buyer beware. CALL US FOR SIDE BY SIDE SCENARIOS and FULL DISCLOSURE ON ALL OPTION ARMS.
The Option ARM is an exceptional loan for anyone who wants to minimize the amount of their monthly mortgage payments, due to a short term hold of a property, achieve investment goals, payoff other debt, buy investment property, qualify for a larger home, or even buy your first home. If you want complete control of your cash flow this loan allows you to have multiple payment options each month. The minimum payment option allows you to pay the lowest possible payment each month. After the first month, however, if you choose the minimum payment option, any excess interest due each month will be added to your principal balance. The next option would be the interest only payment option based on the current interest rate (margin + index). Interest only allows you the lowest possible payment each month without adding to the principal balance. Your other options would involve paying both interest and whatever portion of principal you choose each month. This puts you in control of your cash flow each and every month and allows you to decide whether to pay the minimum payment or any other amount above the minimum payment. You could pay a fully amortized 30 year, 15 year or even a 10 year payment option if you choose. The various payment options will show each month on your statement. What’s the advantage to this loan? The cash flow control that you can have using the monthly payment options. This loan allows you to control where and how you use your cash. If you choose to pay the minimum payment or the interest only option in any given month that frees up cash to do other things. This loan can allow you to catch up if you are behind in retirement savings, it can allow you to purchase investment property, or just qualify for a home. It can also allow you to pay off other higher interest rate debt and replace that debt with tax deductible debt in your mortgage payment. There are numerous advantages to this loan depending on where you are in your life and what your goals are. Call us to discuss the advantges in more detail. This loan over time has tracked 1.00% to 1.50% lower than the traditional fixed rate loans and that means you can save thousands of dollars. Based on rates as of this writing the MTA loan with a good margin is approxmately even with 30 year fixed rates. Teere are several different indexes you can choose and each has it advantages and disadvantages. The MTA index tends to be the most populare index. Remember the rate on this loan will move each month based on the Index plus whatever MARGIN you have. This is why the margin is so important when you choose this loan. In addition the margin will determine whether or not you have a prepayment penatly. It is not unusual to have a 1 year prepayment penalty on this type of loan but any longer than one year and you are probalby paying to high a margin and frankly the lender is making too much money. Click here to calculate your monthly payment! The OPTION ARM with the best margins does require good credit and some restrictions do apply so call for details. There are Option ARM's availabe even if your credit is not prefect so give us a call to see if you qualify. Index: MTA Index (as of 10/26/06 4.758%) (Click here to view a Market Snapshot and see current indexes) Add on for cash out refinances (call for details). Non Owner Occupied loans available call for details and margins. **This is not an offer to lend please call for Good Faith Estimate and Truth in Lending Statement based on your loan amount and specific transaction. All transactions above 80% LTV will require Mortgage Insurance or will require 80/10/10 financing to avoid Mortgage Insurance. APR shown based on loan amount of $333,700 purchase loan with 20% down payment. Call for further details.
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