Do You Understand Your ARM Mortgage Loan?

The Option ARM mortgage loan was the most common type of loan program offered in the “housing boom” years.

Most homeowners chose this Option ARM mortgage loan because it proposed a 1%-2.95% interest rate and offered an affordable lower payment on high loan balances.  Little did most homeowners know that this loan would soon “bury” them. 

Are you familiar with mortgage terminology?  Do you know the different types of adjustable rate mortgages (ARM)?  If you answered …No.  Please pull out all of you loan documents and find the Promissory Note and Prepayment Rider.

Here’s a quick lesson to get a better understanding of your current loan and why you may not want to tie yourself to another loan like this.

OPTION ARM – PICK A PAYMENT

Options Description Definition
Option 1 Minimum Payment Although this option offered the least payment hardship, it does not pay down the principal or interest.
Option 2 No Deferred Interest This option pays down the interest only not the principal.  Even though you’re paying down the interest, nothing is being applied to the principal
Option 3 30 Year Amortization This was the better option because it pays down the principal and interest within the 30 year timeline (If there was no balloon payment option attached)
Option 4 15 Year Amortization Much higher monthly payment, however, the loan would be paid off within 15 years.  (If there was no balloon payment option attached)

Please read further for detailed explanation of how this loan works with the caps, indexes, etc.

 

Even though Options 3 and 4 were the most desirable options to select, the reality is that those monthly payments were tremendously larger than Options 1 and 2. The reason why Options 3 and 4 were larger was due to a higher loan balance than what most homeowners could even qualify for and afford.

Unfortunately, for most of you, this loan has become due and payable and you have no equity in which to refinance.  To make matters worse, some of you may be unemployed or are experiencing other financial hardships.

Here’s how it works:

Hybrid Adjustable Rate Mortgage Loans

Program Definition
5/1 Int Only
10/1 Int Only
The first number 5 and 10 means that the loan has a fixed interest only rate for  5 or 10 years.  There is nothing ($0) being applied toward the principal.  Upon the 61st and 121st month of the loan it will convert to an ARM and adjust up or down once(1) a year based on the loan product that was originally used. (see indexes here)
3/1 ARM
5/1 ARM
10/1 ARM
The first number which is the 3, 5 or 10 means that the loan has a fixed interest rate for 3, 5 or 10 a year period.  The loan will convert to an ARM after 3, 5 or 10 year term. The “1” means that upon the 37th, 61st, and 121st month of the loan, it will adjust up or down once (1) a year.  The loan will adjust based on the loan product/index that was originally used.  (see indexes here)
3/6 ARM
5/6 ARM
10/6 ARM
The first number which is the 3, 5 or 10 means that the loan has a fixed interest rate for 3, 5 or 10 year period.  The loan will convert to an ARM after 3, 5 or 10 year term. The “1” means that upon the 37th, 61st, and 121st month of the loan, it will adjust up or down once (1) a year.  The loan will adjust based on the loan product/index that was originally used.  .  (see loan products/indexes here)
2/28 ARM
3/27 ARM
This loan is used for borrowers that have credit issues and is a solution to resolve a temporary problem.  The first number means that the loan has a  fixed interest rate for 2 or 3 years.  The second number 28 and 27 means that the loan will convert to an ARM amortized (pay down)over 28 or 27 years based on the loan product/indexes originally used.

Most lenders will use one of the following loan products/indexes:

Prime Rate          (Bank Prime Loan) LIBOR (London Interbank Offering Rate) COSI   (Cost of Savings Index)
MTA          (12 Mo. Treasury Average) T-BILL                 (Treasury Bill) CODI   (Cost of Deposit Index)
COFI          (11th District Cost of Funds) CMT       (Constant Maturity Treasury) CD     (Certificates of Deposit)

What Your Lenders Didn’t Tell You

What your lenders didn’t tell you was that these loans were “eating” the equity in your property when you selected to make monthly payments on Options l and 2.

The other big secret that you probably didn’t know was that this loan was originally designed for investors….not homeowners.  This loan was great for investors because it offers very low mortgage payments for investors that planned to quickly sell and “flip” the property .   Now doesn’t that make sense.

In conclusion, it is very sad that so many homeowners were misled, misguided and uninformed.  To that end, please take advantage of this website to learn before you purchase another loan.

Let me know what you think about how you can prepare for your loan modification.

 

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