I was thinking today about Pay Option ARM's and wondering if they made sense for you, the borrower. I think I came to the conclusion that, most of the time, they really don't. The one exception might be if you're an investor who doesn't plan on holding your property that long or you're unsure about if your property will always cash flow. Flexibility in payments may work for you.
With that in mind, I believe Pay option ARM's were created to make us, the mortgage salespeople of the world, a whole bunch of money. In my office, it seems as if a lot of my co-workers were interested in putting their clients into Pay Option ARM's because they could or did earn big rebates from the lender. Furthermore, it appears that part of our current mortgage crisis in the United States is due to borrowers being put in "exotic" loans such as option ARM's. When the loan fully amortized (typically after 3 years or so), the borrower was often upside down in their house and faced with foreclosure.
I'm one who is actually glad that most lenders have severely restricted or eliminated their Pay option ARM programs. Yes, I've tried to sell them to investors with no takers. But I'm not sure that they're always in the best interests of our clients. And that's why we should be in business; not to make a potload of money but to get our clients what makes sense for them. If we do our job, the money will naturally follow. What do you think?
Paul McFadden
I had one client to whom I mentioned an Option ARM, but we decided it wasn't right. No other client of mine has had those particular needs.
As to your assertion that they were invented just to make brokers as extra buck, I see two things:
First, even if Option ARMs were invented for the sole purpose of generating commissions, and I doubt they were, there is still a very limited niche where they make sense. With the very competitive market we are leaving came the pressure to develop new kinds of loans. Option ARMs actually are very interesting instruments. They happen to be dangerous instruments as well.
Second, the whole business of brokers acting as salesmen taking money from lenders to push certain products on clients who do not need those products is the greater problem. When one works for fully disclosed compensation, then one truly has the freedom to seek the best deal for your client.
Thanks, Jefferson. Well said.
Paul