In the video, reporter Maureen Kelly suggests that Option A.R.M. loans are OK for some folks. I disagree. These are bad loans—expensive, complicated, and loaded with hidden fees. If you don’t know the right questions to ask, or if you have an unscrupulous smooth talking loan officer, you may find yourself in a mess soon after you move in to your new home.
Don’t be fooled by “low introductory rates”.
Introductory means temporary.
Your low payments will only last for one to five years. And you are not saving any money by paying the low rate because you are only making partial payments during the introductory period. The part that you do not pay is added onto your principal. The bank is only deferring (putting off) your payments. Eventually, you will pay every penny.
After the introductory period is over, you will have to pay the full payment. In the video, the introductory payment is a low $1,108 per month—very affordable. But when the option period expires, the payment more than doubles to $2,875 per month. The new, higher payment is probably out of reach for someone who was comfortable paying $1,108. Most of the time, this situation spells f-o-r-e-c-l-o-s-u-r-e.
Banks will do their best to make their money. They are not concerned about you over extending yourself. Be sure to educate yourself and ask the right questions, such as:
1. How long is the option period?
2. What will my interest rate be once the option expires?
3. What will my monthly payments be once the option expires?
4. What will my principal balance be when the option expires?
5. Once the introductory (option) period is over, will any part of my payments go to reduce my principal, or is this an interest only loan?
6. Is there a pre-payment penalty?
In the video, Maureen explains how you end up owing more than you originally borrowed to purchase the home.
If housing values do not grow while you are living in the home, you can end up owing more than your house is worth.
If you have to sell within the first 10 years, you will probably take a loss, which means you will owe money at closing just to get out from under your mortgage.
You are supposed to MAKE money when you sell a home, not pay out! Can you imagine having to write a check to SELL your house. It is happening more and more. Don’t let it happen to you.
Most people are better off renting than getting into an Option A.R.M. loan.