Payment Option ARM Mortgages Ready to Explode

Today, CNN covered the payment option arm situation that may be setting up people for diaster. According to the article they quote Christopher Cagan the director of research and analytics, First American Real Estate Solutions.

There may be a trigger ceiling, meaning when the balance reaches a certain level -- say 120 percent of the original balance -- the introductory terms will end and the rate will reset upward,

This is called the recast function of the payment option adjustable rate mortgages. Must people who have these loans are not even aware of this clause contained in the terms. We have developed a payment option arm mortgage calculator that calculates this recast amount and what to expect from the new mortgage payment.

What makes this particularly worrisome is the finding from Mr. Cagan's research:

homeowners took out 1.3 million ARMs with teaser rates below 2 percent... Of those, 21.5 percent have negative equity, where the market value of the home is less than the amount owed

If this situation creates many to go into foreclosure, these same foreclosure properties can further push down property values in those area's further compounding the affect of the real estate slow-down.

Additionally, what many home owners are not aware of is that the current "fully indexed mortgage rate" of these pick-a-payment or payment option arms is currently well north of 7.00% while a 30 year fixed mortgage is near 6%. Here is why...

Index + Margin = Fully Indexed Mortgage Rate
COFI Index = 4.277% + 3.5% = 7.777% Fully Index Rate

If borrower is making the minimum payment of 2% but the mortgage is collecting interest at 7.777%, there is an extra 5.777% of interest being added onto the loan every month.

If you currently have a negative amortized mortgage be sure to use our payment option arm mortgage calculator to fully understand what is in store and feel free to contact me with any questions you may have.