Home loans to avoid – Option ARM
Many Americans have unwisely chosen what is called an Option ARM (Adjustable Rate Mortgage) home loan. It appears to be a very attractive and flexible home loan that allows you to choose the amount of your repayments and even offers an interest only payment choice. However, although this might be great to get you through a couple of tough months, eventually the lender is going to want you to make up these payments. If you find that you can’t do that, the loan will be recast or in other words, reassessed and a new loan starts.
The problem with this is that if you’ve only been paying interest for a few years, you could end up owing the lender more than your house is worth, so you’re now in negative equity. When the loan is then recast, your payments could go so high that you can no longer afford them, so you may well have to sell your house. But that’s not the end of it because even if the whole value of the sale goes to the lender, you’ll still owe them more money.
You would be far safer with a fixed rate mortgage because at least then you’ll know exactly what your repayments will be for the period of the fixed rate and you can always renegotiate with your lender – or move to a new lender – at the end of that term.