Click on the title to link to this article. This article is talking about those with “pay option” arms. In our opinion, these along with the drop in housing values are the two biggest reasons for this mess we are in (on a very macro level). We preached to people, “Stay away from these loans”. The problem is lenders did not educate their clients as to the full story on these bad boys.
Here is a run down of a pay option arm. You have the option to make four different payments every month. Remember the adverting of 1.5% rates and stuff. Well, those were option arms. One of your options was to make a payment with that rate, a 30 year fixed rate (which was always way higher than the going rate), an interest only 30 year rate, or a 15 year fixed rate. The big, big problem with these loans was paying at a 1.5% rate meant your mortgage was actually growing because your note was not based on that rate but a higher one. So you were not covering all the interest every month and, thus, your mortgage would grow. Now for markets like CA, NV and AZ where housing values were sky rocketing, nobody cared. Unfortunately, when the market came crashing down those people were screwed for two reasons:
1. They were now way upside down on the house since the value dropped and their mortgage had increased.
2. The rates on these ARMS started adjusting and, suddenly, people could not make those payments because they did not realize how high the payment would go. So they thought, “I’ll just refinance.” Oh now you won’t because the guidelines changed so fast that most of these people could not get a loan any more because they needed stated income. So what would they do? Walk and get foreclosed on; they literally had no choice because they were stuck.
A screwed up mess has sense unfolded, and this is a huge reason for it. Read the article and shoot us any questions.