Option ARM's

The Option ARM is known in my part of the world as a "California loan". This can also be said of the 40 year and yes, the 50 year fixed rate mortgages. These are loan products that were created for high cost areas, where buying a home was almost impossible unless you did some sort of creative financing.

The article here shows why the product is so dangerous. This was a product that never should have gotten off the ground. It depended solely on the idea that the home would increase in value within the duration of the fixed teaser rate period. If this happened, viola, you had equity in your home and never had to pay anything but interest toward it. But what has happened is a different story. Values have gone down in the once hottest markets in the country and now those individuals who took out interest only loans owe more than there home is worth. Owing more than what the home is worth makes finding a new loan almost impossible and ARM loans are built to go up over time.

It's a sad story to be sure, however, there are people who used these products in areas of the country that there was no reason to be used. I am from Indiana. We did not see a vast increase of property values during the boom years of 2001-2005. The homes in our state are some of the most affordable in the country. There is no reason to write an option ARM in my market based on those two facts. However, I have seen many people take advantage of this product so that they could move into their dream home and are facing an ugly ending when their home will be taken away if they are not able to keep up with the ARM payments.

The boom years will have a fall out over a number of years. My advice, save for a down payment no matter how minimal. Go to a bank or a credit union for your loan. Stay away from brokers. Do your homework before going out to look at homes or apply for a loan.