Warning: Illegal string offset 'html' in /home3/loanuniv/public_html/forums/cache/skin_cache/cacheid_1/skin_topic.php on line 909

Warning: Cannot modify header information - headers already sent by (output started at /home3/loanuniv/public_html/forums/cache/skin_cache/cacheid_1/skin_topic.php:909) in /home3/loanuniv/public_html/forums/admin/sources/classes/output/formats/html/htmlOutput.php on line 114

Warning: Cannot modify header information - headers already sent by (output started at /home3/loanuniv/public_html/forums/cache/skin_cache/cacheid_1/skin_topic.php:909) in /home3/loanuniv/public_html/forums/admin/sources/classes/output/formats/html/htmlOutput.php on line 127

Warning: Cannot modify header information - headers already sent by (output started at /home3/loanuniv/public_html/forums/cache/skin_cache/cacheid_1/skin_topic.php:909) in /home3/loanuniv/public_html/forums/admin/sources/classes/output/formats/html/htmlOutput.php on line 136

Warning: Cannot modify header information - headers already sent by (output started at /home3/loanuniv/public_html/forums/cache/skin_cache/cacheid_1/skin_topic.php:909) in /home3/loanuniv/public_html/forums/admin/sources/classes/output/formats/html/htmlOutput.php on line 137

Warning: Cannot modify header information - headers already sent by (output started at /home3/loanuniv/public_html/forums/cache/skin_cache/cacheid_1/skin_topic.php:909) in /home3/loanuniv/public_html/forums/admin/sources/classes/output/formats/html/htmlOutput.php on line 141
Option-Arm???? - LoanUniverse Community

Jump to content


Option-Arm????


21 replies to this topic

#1 found50

    Part-Time Teller

  • Members
  • 6 posts

Posted 21 December 2004 - 12:26 AM

I am new to this board, (glad I found it!!) let me introduce myself...
I am 30yr old Father & Husband, live in Las Vegas, born in WA, and own a growing Ice Cream Truck Company. My parents weren't very money savvy, so they taught me how to work hard, but not how to USE money. The last few years I've really matured & I have been trying to learn the things I need to know to continue building security for my family & I.

We purchased a home at the end of Dec. 2002. We did 100% financing. My credit was SO/SO, and I had to do a 7.5%, 2 year ARM on the first & a 13% 30yr fixed on the second. NO REGRETS. Heck, in the 2 years we're pushing 50% appreciation!!!

It's time to refi, my score is up a solid 50 points since the original purchase and we are ready to stream line the 1st & 2nd + take out a little cash for business expansion and home improvements. We have to do a stated income, self employed doc loan. I lean toward to stability of a 30yr fixed, but I know this isn't always the wisest choice. With my situation I think 6-6.5% is ball park on a 30yr.

We plan to remain in this home for 10-15 years, but could move in 7 or so. (Although I think it's a mistake to stay at all, a family of 3 has no need for a 3010sf home. I think we should sell, take our equity and get a smaller home, reduce our expenses & have an easier resale in 10 years. BUT my wife is in love with his home and refuses to leave. blink.gif I will not force her to move though, she is a wonderful woman and always stands side by side with me on all my whims, so if she wants to stay, we stay)

So, here's my BIG question...
What is the low down on Option-ARM's (Flex-ARM's)? I see some HUGE advantages to this mortgage, it would free up a lot of cash (initially?) but I am SCARED to death of the rate adjustments. (The initial rate should be around 4.25%) I am also SCARED that there is more to it than what I am being told. I plan to go full steam ahead after the holidays, so please, help me out here, I need knowledge rolleyes.gif I gotta pick a mortgage.

#2 loanuniverse

    Administrator

  • Admin
  • PipPipPipPipPipPipPip
  • 1,251 posts
  • Gender:Male

Posted 21 December 2004 - 09:39 AM

I think that refinancing is something that you should do specially to get rid of that horrible rate on the second mortgage. You are paying on the neighborhood of an 8.6% weighted average rate on the money that you borrowed.

The first thing you need to do is check your own credit to see if you still have “SO/SO” credit, if you have been paying your mortgages on time during the last couple of years, you should have better credit this time around.

There is no reason to be afraid about the lender keeping things from you regarding the ARMs. Frankly, I find the disclosures that you are going to get to be scary enough. I am not a fan of ARMs mostly because knowing the interest rate that I am going to pay for the life of the loan brings me some comfort. There are certain features of the ARM that could minimize this risk such as:

1- Getting the initial rate to be fixed for a number of years at the beginning {all things being equal, a 5/1 ARM will be better than a 3/1 ARM because the first one assures you that low rate for at least five years}

2- Getting a periodic rate increase cap. Most loans limit the rate increase per year.

3- Getting a lifetime cap.

If I had the option between a 5/1 ARM with a 1% periodic rate increase cap at 4.25% or a 6.25% fixed rate loan and I knew that I was going to be in the house for 7 years, then I would choose the ARM. Because by the time I have to pay 6.25% on the ARM, I would be selling the house. It would get complicated if you do stay for 10 or 15 years, but the idea is the same.

Like I said before, I am not a fan of adjustable rates, but like you said they could be a better choice at times. The problem is knowing the time that you are going to remain in that house. Changing the number of years changes which choice is the best.

Good luck

#3 found50

    Part-Time Teller

  • Members
  • 6 posts

Posted 28 December 2004 - 12:17 AM

Thanks, I am leaning toward the fixed, I am just fishing for info on this option arm. I can't seem tofind ANYONE who has had one, that scares me... dry.gif

#4 Guest_moneymind_*

  • Guests

Posted 04 January 2005 - 01:30 AM

hey there just wanted to give you a little info on that option arm. you are actually the most ideal borrower for the option arm. As in your case, you have recently started your own company, you are doing well and growing as a company but at the same time you are not sure how long this success is going to last. Not to say that it wont but as small business owner you always have to know what your next move is going to be if something happens. So things slow down and money gets a little tight, or you have holidays, or a vacation that you would like to take or whatever the case may be. This is where the options of the option arm really come in handy. You are guaranteed that 1% minimum payment for 5 years. That means that at any time or any month in the first five years you can make a payment of 1% and take that cash that you just saved and apply towards your business, or to go on a vacation, or to buy something nice for your wife. Then the next month you can turn around and make a 15 yr payment at a much lower interest rate than what a 30 yr fixed is going to give you. As you said yourself your property has just appreciated almost 50% over the last 2 years, it may not continue at that pace but you can be confident that it will continue to appreciate at some rate. My point being you can minimize your investment into your home, while using the created cash flow to build your business and at the same time your property is appreciating. Oh and about the fluctuating interest, once you hear about how the index is compiled and what makes it move you will be ready to get this loan for your home and give that business an extra boost. You can contact me directly at <snipped> if you would like to know more.

Edit: Financial professionals must register

Edited by loanuniverse, 04 January 2005 - 07:29 AM.


#5 Guest_husker44_*

  • Guests

Posted 07 February 2005 - 07:50 PM

I am a 25 yr old recently married male and my wife and I have this loan on the twinhome we are building. I will never ever pay principle on my house ever! Why, because why would you give the bank your money and be guaranteed to earn 0%? Why not choose to make the minimum payment and take the monthly savings and put it into any kind of compounding account (savings acct, money market, mutual funds etc.) Compounding interest is the most amazing thing. For example, $100,000 mortgage at fixed rate of %6 for 30 years. Your P and I payment would be $600. In 30 years you would pay $115,000 in interest and a total of $215,000 for the house. BUT if you would invest that same $600/mth and earn the exact same rate of return 6% that you borrowed the money at your total investment earned in 30 years would be $602,000!!! Your investing at the same rate of return you borrowed at but in the same amount of time you have 5X as much money!! Your mortgage is simple interest while any investment is compounding interest and that's why you end up w/5x as much money in 30 years. That's how money works. And FYI, Mr. Alan Greenspan, chairman of the Federal Reserve, has this exact same mortgage on his personal residence with Chevy Chase Bank! Pretty interesting, why would someone as smart and as wealthy as him choose to even carry a mortgage, let alone a CashFlow ARM? Plus, since they've been in existance, ARM's have 100% of the time outperformed fixed rates. So even if rates go up you're still going to have savings every month. As long as your disciplined enough to do the savings, you should do this loan and NEVER have a fixed rate loan.
Matt in South Dakota

#6 loanuniverse

    Administrator

  • Admin
  • PipPipPipPipPipPipPip
  • 1,251 posts
  • Gender:Male

Posted 07 February 2005 - 09:43 PM

Hmmm, Matt you are wrong in a couple of your assumptions, but if ARMs are what you like then go for them.

#7 MSGulfCoast

    Credit Analyst II

  • Members
  • PipPipPipPipPipPip
  • 61 posts
  • Location:MS Gulf Coast, New Orleans, LA
  • Interests:Reading, Politics, Skiing, Travel, Freelance Journalism, Finance

Posted 07 February 2005 - 10:29 PM

The other brokers and lenders may hurt me for this ohmy.gif but I actually believe in paying off your home......EVENTUALLY. After reading through the posts on this thread, I can see some validity in everyone's view. So here's my two cents:

I like Fixed Rate loans with Interest Only options. Here's my point: Yes, you have a higher interest rate than an arm. But you have stability. And the interest only option gives you the flexibility of a low payment. These are especially good for self-employed borrowers...I've got an I/O option on my home loan, a 30 year fixed at 5.875%. When I have a good month, I sock a few hundred extra bucks to my principal. If it's Christmas, and I'd rather play Santa, I don't have to stretch for a high payment. At the end of 15 years, whatever principal I haven't paid off will roll over AT THE SAME 5.875% to a 15 year fixed loan. Either way, no prepayment penalty, no caps, no adjusting rate, no balloon.........
I think this is one of the best options out there. I got the low payment, AND a fixed rate for the longest term possible.

PS- If you want the lowest payment, why not take a fixed rate loan out for what money you need now, and look into a HELOC (Home Equity Line of Credit) for future expenditures. This way you won't start paying interest on money you're not using yet, and you won't lose your low interest rate, closing costs, etc. by refiing again in 4 years.

Email me if you'd like me to run some numbers for you.

Good Luck!

Edited by loanuniverse, 03 August 2005 - 08:43 PM.


#8 Guest_Guest_*

  • Guests

Posted 08 February 2005 - 11:52 AM

What am I wrong about? Do you know that w/ a fixed rate you a paying an insurance premium for the bank to insure their profit if the Fed Funds rate goes up. Not to mention that you are knowingly putting your principle ( your own money) in a place where you will be guaranteed to earn 0%, why? Comparing a $250,000 30 yr mortgage at 6% w/ the same mortgage with a payment rate of 1.25% where the minimum payment is capped at going up 7.5% of the payment, not interest rate, for the first 5 years. We know then that at worst case scenerio the most your minimum payment can be in year 5 is $1112.62 compared to $1498.88 in a fixed. So in 5 years we know we're going to save $31,862.90 at 0%. If you put 100% into savings and never invest another dollar for the next 25 years and avg a 10% rate of return you just created an extra $508,714.14 for your net worth. From just a 5 year savings committment! Why not just refi in 5 years and do it all over again and create more net worth? What's wrong with this loan universe?

#9 loanuniverse

    Administrator

  • Admin
  • PipPipPipPipPipPipPip
  • 1,251 posts
  • Gender:Male

Posted 08 February 2005 - 03:41 PM

Matt:

”… BUT if you would invest that same $600/mth and earn the exact same rate of return 6% that you borrowed the money at….” You are making a big assumption there about the rate of return that you could get. You mention savings accounts and money market accounts. If you can get 6% on those then I need to know where. A mutual fund puts your principal at risk and the rate of return is not guaranteed.

”… since they've been in existance, ARM's have 100% of the time outperformed fixed rates. So even if rates go up you're still going to have savings every month. ….” I hope that you understand that the fixed rate that they are beating is the one currently in effect not the one that you would have locked in at the time of origination. If for example prime where to go up to 9%, and your ARM was tied to prime then you would probably be beating the fixed rate prevalent at that time, but your more conservative neighbor would be sitting pretty at 6% because he chose to go with a fixed rate loan.

”… . As long as your disciplined enough to do the savings ….” Granted that if you are lucky enough to get a rate of return that equals or beat the 6% without putting your principal at risk. I submit for your consideration that the great majority of people are not disciplined enough to do this.

You also forgot to mention:

1- Your plan requires refinancing every few years as most of the mortgages transform into an amortizing product at sometime. {I am assuming they do, not really familiar with residential products}. This means that you might be forced to go to the market at a time that rates are higher.

2- In addition to interest rate risk at the time of refinancing, you have to consider the possibility that your financial condition might have changed making it impossible to get a preferred rate. This could happen also under a fixed rate mortgage, but a lot of people can still make the payments for loans that they no longer qualify for.

3- Variable rates are ….. variable Within the last five years we have seen those rates drop to 50% of what they were in 2000.

4- At the end of the 30 years, your conservative neighbor has $100,000 of equity, which you do not.

5- Because the conservative neighbor has been amortizing his debt his interest payments, which total $115,000 should be lower than your interest payments based on the $100,000 outstanding if the historical average of the last thirty years of variable rates holds true. Take a look at something like prime {I use that as an example because I am familiar with it} the average rate during the last twenty years should be somewhere between 8% and 9%. Even if the average rate is 6% that means $6,000 in interest expense a year or $180,000 in interest expense during the thirty years window.

There is a good chance that your strategy can pay off. Nevertheless, it is riskier than the peace of mind of a fixed rate amortizable mortgage. You can not separate risk from reward. That is how money works.

#10 Guest_Guest_Matt_*

  • Guests

Posted 08 February 2005 - 07:47 PM

If you don't think you can get 6% on your money then that's your opinion. The stock market has averaged 10-12% over the last 70 years. If you want your principle guaranteed then stick to CD's and bonds, that's still better than earing 0% on your equity, which is the only guaranteed thing!

As for the rates, from 1995 -1999, the greatest period of growth in the 200+ year history of our country, the prime rate hit a high of 9% while the highest the 1 month Libor got was 6.125%. From 1994 - 2004 the prime averaged 7.294 while the 1 month Libor averaged 6.677%! Here is a link for you to check out http://www.nva-mortgage.com/historicalchart3.pdf

Here is a 10 year average comparison between a 30 year fixed and fully indexed LIBOR, MTA, COFI, and the 1 year Treasury Index.

Fixed 7.710%
T Bill 7.708% average of 4.833 with a 2.875% margin
COFI 7.490% average of 4.590 with a 2.9% margin
MTA 7.442% average of 4.942 with a 2.5% margin
LIBOR 7.102% average of 4.852 with a 2.25% margin


I do agree with you that most people do not have the discipline to do the right thing with the monthly savings. We as Americans, spend 102% of our incomes. I think you would agree that we need to change how we use our money and our mortgage. Doing things the way your parents and grandparents did won't get it done.

For example, they were taught to pay off their house as quickly as possible. Ok, so they're 70, have a $200,000 home paid off and live on social security chich means they are struggling to keep up with the rising costs of living. They have no way of gaining access to their equity because they have no job. A motgage is a loan against your income not your house. So they essentially buried their $200,000 in the walls of their house. Again, even from just a 5 year savings committment of $25,000 (which is what they would have saved on a $200,000 loan at 1.25% payment rate compared to a 6% fixed) at a rate of 8% they could have had a nest egg of more than $300,000. This could easily be used to make their monthly house payment while it continues to earn interest for them.

Regarding refinancing... How many people do you know that pay off their 30 year fixed mortgage? I have friends who brag about a 4.25% first time home buyer fixed rate they have; well that's great but they won't have that rate for 30 years. The average mortgage only lasts 5 years. Who knows what rates will be like when they decide to buy a bigger house or move b/c they lost their jobs? So if you think you'll have your fixed rate mortgage for 30 years you're in the minority. And the Cash Flow Arm is a 30 year mortgage from day one. After year 5 it turns into an ARM. If you're saving the difference, even if you do lose your job, you have that cash equity which can get you by until your financial situation changes for the better; As opposed to losing your job with a fixed and having your equity do nothing for you.

Regarding my conservative neighbor and his $100,000 in equity...How much money has he earned on that in 30 years? Would you rather have his $100,000 in equity or my $602,000 + I have my house paid off? If your mortgage company called today and asked if you'd rather have an extra $50,000 in equity or $50,000 in cash which would you take? You would probably take the equity!

Nevertheless, I guess you and I will have to agree to disagree. Good Luck!

#11 Guest_investor_*

  • Guests

Posted 10 February 2005 - 12:49 PM

From a strictly financial perspective, you are right. But, if you ever want to retire and not have a mortgage payment, the extra (very small) amount that you would pay on an amortizing is probably the least painful way of achieving that.

As an investor, it is important to diversify. While it is true that your real after tax return on paying down your principle is probably less than the stock market might offer over time, you are also taking on additional risk. A more comparable analogy would be paying down your principle vs. investing in a CD.

As you mentioned, a fixed rate mortgage is "insurance" for rates going up. You pay for this insurance based on your risk tolerance and your life plans. You are also paying insurance (a little bit less) to keep the interest rate constant for the first five years of a 5/1 arm. You would pay no premium on a constantly vairable loan, and are essentially "self insuring" against rising rates.

Investing in the stock market rather than the principle of your mortgage is the same thing. You are "self insuring" against a decline in the stock market.

The key is that you have to evaluate which option best fits your plans and ability to weather the storms when they come (and they always do...)

So, I don't have a problem with people that are financially sophisticated doing this (e.g. Alan Greenspan), but the interest-only lenders seem to market primarily to those people that are most concerned with shaving an extra $100 off of their payment to make ends meet or to qualify for a slightly larger house. For them, the chance that they would invest that money is slim, and the "forced savings" that an amortizing mortgage offers would make them much better off in the long run.

#12 Guest_Jerry_*

  • Guests

Posted 17 February 2005 - 01:01 PM

The only problem with the mathematics offered by those who support the "option arm" is that the minimum payment of 1.25% is a fully amortizing rate- that's right you pay the principal down with each payment! Also, as the payment increases each year by a limit of 7.5%, the interest rate that you are paying is also increasing closer to the fully indexed rate. That's why the amount of negative amortization is dropping.

#13 Guest_C.L_*

  • Guests

Posted 06 April 2005 - 06:23 PM

Matt (from South Dakota) I have been researching loan programs and Indeces for about a month due to a project my boss has assigned. I have to agree with your concept on ARMs and how they may supercede conventional fixed rates to a degree. It seems like the market trend for ARMs are at the top of the charts. There are people who rather not deal with the gamble of ARMs and prefer fix rates for peace of mind. The reason for this is that "Not All Consumers Are Alike." What may be a good loan for you and I may not be good for your mom, co-worker or even your conservative neighbor. We all have different needs and financial situations not to say the least. In the process of completing my research, I have decided to move out of my (rented) condo and buy a new home as a first time homebuyer. You better bet your bottom dollar I will not get a fixed rate. I will not stay in a starter home any longer than 5 years. For this reason, I know an ARM will work out best for me. The savings that I will accumulate every month will go into a seperate account. I am aware of the situation I will face getting into an ARM product therefore I will not lack the discipline in putting into that savings account every month. I am a single mother, just graduated with a degree and beginning a path to a great career and so buying a home is the next big step. Based on the pros and cons of ARMs, I have gathered enough research to choose an ARM and use "my money" wisely.

#14 melinda

    Summer Intern

  • Members
  • 1 posts

Posted 28 July 2005 - 02:19 PM

my name is melinda, i'm newly divorced and will be looking to buy a home in the next year. my ex-husband was the one who was in charge of home purchases in the past, which was fine w/me, because the thought of mortgages and apr's and everything involved w/home buying was something my brain just could not wrap itself around. i just signed the papers. silly me....

so, i have been doing research on home buying and the best type of loan. i think, w/my goals, i like the idea of the arm. i am conservative, so this idea makes me a little nervous, but w/my plan of only being in my next home for 3-5 years an arm does make sense.

the choice option arm sounds good, but i get confused w/the 4 choices i have to choose from every month. would you please explain to me how all this works, using very simple terms (please assume i don't know even the simplest of mortgage/lending lingo). it would be very helpful if you could use a $200,000 home in your example. and what the worst case scenario would be in this choice of an arm. should i put $ down, or can i go into this w/no $ down? my fico score is 798.

thank you!

#15 diversifiedmortgage

    Part-Time Teller

  • Members
  • 4 posts

Posted 03 August 2005 - 05:54 PM

QUOTE(melinda @ Jul 28 2005, 12:19 PM)
my name is melinda, i'm newly divorced and will be looking to buy a home in the next year.  my ex-husband was the one who was in charge of home purchases in the past, which was fine w/me, because the thought of mortgages and apr's and everything involved w/home buying was something my brain just could not wrap itself around.  i just signed the papers.  silly me....

so, i have been doing research on home buying and the best type of loan.  i think, w/my goals, i like the idea of the arm.  i am conservative, so this idea makes me a little nervous, but w/my plan of only being in my next home for 3-5 years an arm does make sense.

the choice option arm sounds good, but i get confused w/the 4 choices i have to choose from every month.  would you please explain to me how all this works, using very simple terms (please assume i don't know even the simplest of mortgage/lending lingo).  it would be very helpful if you could use a $200,000 home in your example.  and what the worst case scenario would be in this choice of an arm.  should i put $ down, or can i go into this w/no $ down?  my fico score is 798.

thank you!

View Post




I have some material that would clear up the option arm scenarios(I would need your email to forward).

The option arm has a short introductory period as low as 1% and up to 3 months then you will receive the 4 payment option. If you choose minimum payment you typically pay a less that interest only payment which applies negative principal back to the loan amount. This option will only exist until the Loan to Value Ratio stays under 115%. When that option goes away you can pay 30yr,15yr, or interest only. Keep in mind that the so called fixed amortization (30,15) are based on a margin and index and will adjust overtime to provide the intended payoff date.

For most short term loans 1-10 years I recommend the Libor or Treasury Arm loans. These loans come with the option of interest only. I would be happy to price any of these options out for you. What state will the property be in?


Tyson Knudsen
Diversified Mortgage





1 user(s) are reading this topic

0 members, 1 guests, 0 anonymous users