Option ARMs Scare Me
Is it just me or is anyone else scared by the financial mishaps option ARMs seem to encourage? An option ARM is an adjustable rate mortgage that is dubbed as being "flexible" because the borrower has the "option" as to how much he or she wants to pay in a given month. In essence, you can opt to pay less than the minimum interest payments that would be due in a given month. This, of course, pushed the debt burden forward. Just like with minimum payments on a credit card, with an option ARM you could end up taking decades longer to pay down your house, increasing the total owed.
Do option ARMs ever make sense? For that matter, do interest-only loans ever make sense? I love how realtors/lenders interviewed always make comments about how the interest-only products (and option ARMs) are well-suited for certain people - salesmen who get paid on commission, investors who need to have finer control over monthly cash flow... Hrm, maybe these are the types of people who these products are designed for, but then why did more than 40% of the home purchases last year use interest-only loans? I can't fathom that the country's salesmen are buying up the marketplace so that means either a marked increase in investors purchasing properties (intelligent choice, guys - hey, the top of the market has been reached, let's buy now!!) or people who shouldn't be using interest-only loans are taking out interest-only loans in droves. Not only shouldn't these people be taking interest-only loans, but it's a poor financial decision to boot if you plan on living in your purchased home for any significant amount of time. Why in the world would you get an interest-only loan that reamitorizes every month when long-term interest rates are at historic lows!? Wouldn't this be the time to get a 15- or 30-year fixed loan?
Regardless, people using these techniques are significantly increasing their risk. What happens if a job loss occurs, or medical bills pile up? And if such large percentages of home buyers are taking this level of risk, that puts a good chunk of the housing market at a risk level that's far from prudent.
3 Comments:
Scott,
I couldn't agree with you more. While the housing market where I live (Baltimore, MD) is not as bad as San Diego, it's still out of control.
I'm also waiting (hoping) for the burst so that I can afford a nice single family home.
As for ARMs, I predict that after the 7 or 10 years that most people have, interest rates will go up, poeple won't be able to afford their payments, they'll be forced to sell their homes, and more houses will be on the market. More supply, same demand = cheaper houses (I hope).
And interest only loans!!!?? Forget it. As a general rule for life, you ALWAYS want to pay as little interest as possible (whether it's a car, a stereo, a house, or something else entirely). In fact, if I'm able to pay for something outright, I always do. That is why I will probably never buy a brand new car.
Scott,
Nowadays most people are staying in their homes on average between 7 to 10 years (look it up). So with this in mind, why would a 7 year ARM be a bad idea for young couples just starting out?
I agree that ARMs are not for everybody, but they are beneficial for some.
Anonymous, I agree that IF you are going to stay only 7 years in a home and you know that to be certain then, sure, a 7-year ARM would be fine. But what happens if you 'fall in love with the place' as you live there and want to stay? Or if the neighborhood goes down the tubes and now you owe more on it than the house is worth? Or any other thing I label as 'life happening' happens and you need to stay put for more than 7 years?
How often do the best laid plans unfold as we expect?
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