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I think it would be a good idea to open a thread on the application of this
loan product because it is the hottest thing going right now.
I am going to state my opinions, and I welcome everyone's responses or
additions.
This is a fantastic loan program, given the right scenario but, clearly, it
isn't for everyone. For starters, when I offer this program, I want my
borrowers to ONLY consider the minimum payment option. Of course, I
thoroughly explain all the payment options but, if my borrowers intends to
make the I.O. or either of the amortized payments, then this loan isn't for
them.
Why? Because the other payment options change every month. If my borrowers
want an I.O. or a fully amortized loan, then I will offer them that, instead.
The minimum payment option is for a specific kind of borrower, for instance:
1. One who will use the savings in the payment to structure a retirement
program with a reputable financial planner.
2. One who needs the lower qualifying rate to get into their home.
3. I just closed a loan for a couple who are in the process of buying a
franchise sandwich shop. They pulled a large amount of cash, and want to
keep their payments low until their business stabilizes. This loan is
perfect for them.
Regardless the instances, I make it clear that this loan will need to be
refinanced within 5-years, probably closer to three. If it's a first-time
buyer, hopefully they'll have enough equity and their income has changed to
do a rate-and-term into a 3/1 or 5/1 hybrid ARM. By then, they'll probably
be moving on. (I am in California, we do not stay in our homes longer than
5-7 years!).
If they're funding a retirement account, they may wish to refi into another
Option ARM.
In any case, the borrower must fully understand the risks associated with
negative amortization. If the local real estate market isn't healthy
enough to offset ALL of the neg-am, this loan is probably not for them,
unless they have plenty of equity.
I have not discussed the nuances of the program because I assume, as
professionals, you already know that. This thread is about the application
of the product.
I've plenty else to say, but this should be enough to open a round of
discussion.
Any takers?
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Let's Talk About The Option ARM
