Option ARMs have their advantages and disadvantages and you should
consider how they stack up for your particular situation when making a
decision if one of these loans is for you. One thing is for sure: These
loans are not for every one and they are definitely not “no brainers”
as they are often advertised.
Advantages: The positive aspects of
these loans begin and end with the lowered monthly payment and the cash
flow it creates. If in your personal financial situation you can put
this cash flow to work to reduce interest costs somewhere else and this
benefit outweighs the bad effects of negative amortization, this loan
can be a good option for you. For instance, let’s suppose that you have
credit card debt in the total amount of $40000 on which you are paying
19% interest. Then let’s also say that by making a minimum payment as
opposed to the regular payment on your home mortgage you can save $500
every month. If you were to apply those savings to your credit card
debt every month, you are essentially replacing high interest debt with
much lower interest debt and most importantly you are reducing your
overall credit card interest cost quite considerably. In addition,
advocates of these loans often mention that the negative amortization
is offset by the appreciation in property value every year. This point
has some validity especially in high appreciation states like Florida
and California. In a state like Texas, property appreciation will
offset some of the negative effects of making such a low payment but
chances are that it won’t eliminate them completely.
Disadvantages:
The negative aspects of these loans are not mentioned much in the many
ads covering these loans. First, since these loans are “sold” on the
low low payment hook, borrowers don’t pay much attention to the
interest rate on these loans once the option period expires. Let’s not
forget that after all these are loans that carry adjustable interest
rates and as such, after an “offer” period they revert to the market
rates which are usually much higher than what you would pay had you
locked in a fixed rate mortgage. Second, as we mentioned in the
paragraph above, the only way these loans make financial sense is when
you put the “cash flow” to a better use. Many of the companies offering
these loans, suggest that the borrower could use the extra cash flow to
take a vacation and that is a horrible idea. Adding to your home
mortgage balance just to take a vacation is not only irresponsible but
also very dangerous. Don’t forget, this is your home mortgage and you
should not jeopardize it for a vacation. Last, these loans often create
a dangerous false illusion of affordability especially if the borrower
is a first time homeowner. Because of the low monthly payment (which
carries an expiration date), the borrower often feels that they can
afford a lot more house than they actually can. This can create a
reckless situation with the borrower getting in over their head.
Whatever your decision, we aim to inform you on all the different sides of a financial product so your decision can be educated.

Also Read:

• No Related Post