New Hybrid Option ARM's to Help Prevent Mortgage Foreclosures

By Sheryl Landrum
Mortgage Credit Problems Columnist

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Many homeowners who opted for option ARM mortgage products have found themselves unable to manage their house payments as their loans have adjusted upward; unfortunately, many of these homeowners are now facing home foreclosures. There is a new Option Arm product out now that is designed to help avoid the high mortgage foreclosure risk of Option Arm products. However, Option ARMs may still present high risk for a home loan foreclosure.

Borrowers need to remember option ARM products potentially involve negative amortization and may put you at higher risk for a mortgage foreclosure than other mortgage products. Option ARMs offer the borrower a minimum payment, as low as 1%, as well as an interest only payment (based on the margin and index which may be higher than a normal ARM product), a 15 year fully amortized payment, and a 30 year fully amortized payment. Prior to the Hybrid Option ARM, after the 1st year of the mortgage, the minimum payment would increase 7.5% (still not too bad); however, the interest rate would begin to adjust--often monthly--and every time the homeowner did not pay at least the interest due, the difference in payment would be added to the mortgage loan balance.

The Hybrid Option ARM now allows you to fix the interest rate for up to a five year period leading to more stability against negative amortization and a lower foreclosure risk.

However, there are other issues to consider with Option Arm products:
  • They may come with costly pre-payment penalties which could preclude borrowers from refinancing or selling if they needed to.
  • In a declining market, borrowers who seek to refinance out of Option ARMs find their loan balances have grown higher than what their home is worth. Again, unable to refinance, many of these homeowners allow the mortgage to foreclose.

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