Option ARM: Not a Good Mortgage Loan Option

When the time comes to buy a home, you want to be sure that you get the right home mortgage loan. After all, there are several options available. In today's mortgage market, you may not have to worry so much about "creative financing," but the day will probably come again when credit is cheap and easy. And it is better to be forearmed. One of the mortgage loan options that was gaining popularity prior to the credit market crash was the option ARM. In some cases it can still be found (you just have to have very good credit). But just because you can get something doesn't mean you should. This is especially true of the option ARM.

What is an option ARM?

The option ARM is a type of adjustable rate mortgage. It allows you the "option" to set your own payment amounts. You can slow up paying on the principal of the loan, and you can even defer some of the interest payments. The whole point is to get your mortgage loan payment down. Additionally, an option ARM is one of those that comes with a ridiculously low interest rate. Well, it does at first. Once the intro period (anywhere from six months to three years) ends you go to the variable rate that is so common with an ARM.

Option ARM home loans became so popular because they allowed home buyers to put off making payments on the principal and even on some of the interest. This meant that someone whose debt-to-income ratio was too high for a home loan, or someone who wanted a bigger, more expensive house, could qualify because the payments would be lower. But the payments don't stay lower forever.

When the intro period is over, the interest rate goes up. That's makes for a higher payment right there. Then, at some point, you have to actually start paying on the principal and paying back the deferred interest. It's all there, and it all has to be paid. That's where the credit market crash comes in. When the payments started going up, borrowers found they couldn't make the payments after all. And then foreclosure set in. The Option ARM home loan certainly did its part to contribute to the subprime lending crash.

The home mortgage to get instead

Rather than something like an interest only home loan or an option ARM, go traditional. All loans are harder to get now as a result of the credit market crash, but you might still be able to get a traditional home mortgage. A 30 year fixed loan will provide a stable monthly mortgage payment, and it will also mean that you are paying on the principal from the outset, building equity, or ownership, in your home. While it may be boring, and while you may not be able to get the exact house you want, in the long run, you will benefit from a more traditional home mortgage.