Option ARMS: How they work and just how ugly they can get.

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<p>I actually think I/O loans are great with the caveat that you are a financially responsible person. I/O does not increase your principal and can be tied in with a 30 year fixed rate. When we were seriously looking a couple of years ago, Quicken's 10/30 loan looked really attractive. The loan makes sense economically because one is making payments mostly on the interest for the first ten years of a 30 years loan anyways. </p>

<p>My view is that why should I lock myself into giving the bank more money. Since I am fiscally responsible, I will just make payments as if it was a 30-year fixed. However, if some emergency comes up I have the flexibility to pay less. It is all about financial responsibility. Also, most people make will make more money in ten years so having a lower payment up front is beneficial. </p>

<p>The dangerous part is that if you only make the payment for interest for 10 years, you end up with a 20 year fixed loan at the end.</p>
 
<p>From the investor side of this, interesting option ARM article on Calculated Risk today. Bascially, all that unpaid interest is counted as profit in earnings statements.</p>

<p>http://calculatedrisk.blogspot.com/2007/10/accounting-for-negative-amortization.html</p>
 
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<p>I thought I knew this stuff, but didn't realize that they reset in less than 5 years because of the caps. Also, my mtg broker buddies didn't believe in these loans, so I never got referred any.</p>

<p>These loans are still being made so the banks can cover their nut?</p>

<p>Oh, my.</p>

<p>The hub and I would pay extra on our fixed rate loan, because I did know that it's all interest for the first 10 years. So our 25 year mtg will be completely paid off in a couple of months. After just 10 years in the house. We didn't pay extra on a regular basis, just when some unexpected bonuses or windfall came in.</p>

<p>And 20 grand when we sold a little house which we rented to (sorry) pestiferous renters.</p>

<p> </p>
 
<p>Liz, </p>

<p> Yes, we renters are pesky.... I just prefer to pay a company to take care of the apts. Its not exacly a cheap, but my cap rate is a meager 3.8%. Next year it will go up to about 7%. </p>

<p>As for these loans, I recognised them for what they were. If you abused it in any bit you'd pay, and pay, and pay. If you'd be able to afford the regular 30 year payment (at about 60-75% of what you can afford). That way you have some room. BUT when you are at maximum of what you can afford, its a reciepe for disaster.</p>

<p>Anyways good luck</p>

<p>-bix</p>
 
<p>The stretching yourself part is hard because I think most people do buy at their max. When we were looking, we could get a 2-bd comfortable but would have to stretch for 3 bd. I know that we would have got the 3 bd just for the future value. </p>
 
<p>Re; Lawyerliz "These loans are still being made so the banks can cover their nut?"</p>

<p>You bet. Here's a recent story on it.</p>

<p><a>http://www.latimes.com/business/la-fi-loanpitch29oct29,0,645070.story?page=1&coll=la-home-business</a></p>
 
On today's IHB Post, there's the monthly ARM reset bar chart from Credit Suisse, where we see most Option ARMS resetting in 2010-2011. I don't what percentage of Option ARMS are negative amortization, but a good number of those Neg Am loans would likely reset 2 years ahead of schedule on their 5 year plan. That would move more resets into 2008-2009 than the chart would suggest, puttting even more pressure on the market in 2008.



Damn, this time next year is going to be ugly.
 
A blast from the past with a nice update chart from Dr. Housing Bubble. Option ARMs are the "O" with a default rate above 30% and rising.



<img src="http://www.doctorhousingbubble.com/wp-content/uploads/2009/04/60-days-late-loans.jpg" alt="" />



Look at those default rates and losses. Yikes!
 
[quote author="IrvineRenter" date=1240914803]A blast from the past with a nice update chart from Dr. Housing Bubble. Option ARMs are the "O" with a default rate above 30% and rising.



<img src="http://www.doctorhousingbubble.com/wp-content/uploads/2009/04/60-days-late-loans.jpg" alt="" />



Look at those default rates and losses. Yikes!</blockquote>
To the moon baby!
 
Here is a little dose of medicine for all here getting a little antsy.

<em>But many people feel that they were left out of the bubble mania and can?t wait to sit on the sidelines for a few more months or another year. What do I tell them? Go ahead and buy but get yourself prepared to flush that down payment down the toilet. If you think waiting 1 year isn?t worth $50,000, $75,000, or even $100,000 them by all means jump in. You are flying in the face of the macro trend and jumping again with the sheep getting ready for the second slaughter.</em> From today's post at Dr. Housing Bubble
 
[quote author="Mcdonna1980" date=1240916489]Here is a little dose of medicine for all here getting a little antsy.

<em>But many people feel that they were left out of the bubble mania and can?t wait to sit on the sidelines for a few more months or another year. What do I tell them? Go ahead and buy but get yourself prepared to flush that down payment down the toilet. If you think waiting 1 year isn?t worth $50,000, $75,000, or even $100,000 them by all means jump in. You are flying in the face of the macro trend and jumping again with the sheep getting ready for the second slaughter.</em> From today's post at Dr. Housing Bubble</blockquote>
I really don't get why so many people are so antsy, impatient, and/or nervous about buying now. I mean, are they that scared that mortgage rates will go up and they won't be able to affordable a home because they are marginal buyers in the first place? I'll be more than happy to pay a 10% rate if home prices drop 50-60% from today's levels (I'll have a lower LTV and lower property tax payment). I want this second wave of foreclosures to teach those kool-aid drinking sellers and realtards a little lesson about humility because we all know there are still way too many of them out there.
 
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