Even as stocks begin to make a recovery on Wall Street, the mortgage crisis continues, and is likely to continue for at least a while longer. Why? Because there are still plenty of nasty surprises coming in terms of exotic mortgages, such as option ARMs. Option ARMs are just the latest in a mortgage market that is seeing one blow-up after another.
What are option ARMs?
Options ARMs are a type of adjustable rate mortgage. They are known for the fact that introductory payments and interest rates are (or rather, were, before it became next to impossible to get them) ridiculously low. The "option" comes in when you can choose to defer part of your principal payments, and even some of your interest payments, until further down the road.
You can probably see where this is going already. Deferment means that at some point you have to start paying. And that is where the trouble is starting. The Salt Lake Tribune reports on option ARMs:
The initially low monthly
payments on these exotic ARMs enabled more people to buy homes and
enticed other borrowers to refinance their existing mortgages to free
up cash for other purposes.
Now, the exotic ARMs are tormenting overextended homeowners,
reckless lenders and shortsighted investors as the teaser rates rise,
dramatically driving up monthly loan payments against a backdrop of
declining property values.
Not that you are likely to get exotic mortgages in this climate, but it is something to bear in mind if credit ever becomes that cheap and easy again. Don’t bite. Stick with something more traditional. You may not be able to get as much house, but at least you’ll be able to keep it.