Aaron was recently looking in a folder on his computer and came across this mailer which we sent out in October 2006 warning our past clients about option ARM solicitations. Option ARMs are mortgage programs that have negative amortization implications when the borrower makes the minimum payment. Not to say that ALL applications of the option ARM programs are bad.
But unfortunately the option ARM program made it into the mainstream mortgage market and consumers who didn’t understand the program were being solicited to use them. This is one of the factors why we find ourselves in the position we are in today.
Here is the copy from our warning mailer:
It has come to our attention that many mortgage lenders are currently soliciting many of our past clients to refinance their existing loans with Option ARM Loan Programs.
· What is an Option ARM? These are complicated loan programs with low “teaser” rates and low initial monthly payments. Many of these programs start out with interest rates as low as 1.00% for 1 month and then increase significantly. As the interest rate increases the mortgage payments actually remain the same which then causes the homeowner’s loan balances to increase through negative amortization.
· Why are they popular? With higher real estate prices and higher interest rates, many mortgage lenders are pushing these products on homeowner’s because of the low initial monthly payment.
· Why are they risky? What is not often disclosed by lenders who push these products is that payments will increase with time as will the loan balance if the minimum monthly payment is made. As a result, consumers are not aware that their mortgage balance is actually increasing with time. Furthermore, lenders are paid greater commissions for pushing these loans with lengthy prepayment penalties which lock in borrowers to these products.
· If you have been solicited by one of these offers and would like more information as to whether or not this loan is good product for you please contact us. Also, visit http://www.businessweek.com/magazine/content/06_37/b4000001.htm for a good article on the subject.