Board Topic: Option-Arm????
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Posted by: found50 Dec 21 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.

Posted by: loanuniverse Dec 21 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

Posted by: found50 Dec 28 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

Posted by: moneymind Jan 4 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.

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