Question:

What are the Option ARM benefits and risks?

Answer:

Yes, Option ARMs are dangerous. Yes, Option ARMs are very useful. Truth is, the Option ARM benefits exist but they are benefits as long as the features and structure and terms of these particularly complex loans are properly comprehended.

Option ARM Greatest Benefits

You can choose how to make your payments - different amortization schedules are available; or, interest-only and minimum payments also add to the nice blend. It is great to be able to qualify for the house you really want, or postpone paying a mortgage through the nose up until 7 years, when your paycheck, or commission, will have doubled.

Option ARM Greatest Risks

The risks are similar to other ARM products risks. If you choose an interest-only option, it may not be possible that you will ever pay off the loan. The loan will not be amortizing, and you will carry your mortgage indefinitely, or will have to refinance once the mortgage payment includes principal. The greatest risk, however, is involved in taking the minimum payment option. Once the loan achieves certain level of indebtedness (say, 110% of the original amount), fully amortizing payments may kick in. If the borrower was not aware of that possibility, they would suffer huge payment shock and possibly suffer foreclosure.

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