[quote=flu]The great thing about a 30 year ARM is that while one might get lucky during the first half of the 30 year watching the ARM come down during a period of declining interest rates, there’s an entire 14-15 years of political and economic uncertainty that one gets to see if rates move in the opposite direction.
If my memory serves me correct, many ARMs that were based on 11th district have a minimum floor that rates can’t go below and also no maximum cap, that will limit how much rates can be charged.
Personally, I would never gamble with an ARM with a floor on one end and no cap on the other, because to me, that would be a lot of risk. But that’s just me. Others could get it to work if that’s the loan product that’s best for them.
There are Helocs that have 3% rates with a 2% floor and 6%cap… I know, because I have one, though currently I’m not using it.[/quote]flu, I don’t know where you got the idea that the Option ARMs of yesteryear (2002/3 and prior) had no floor. Of course, they ALL had a floor which was usually equal to their margin . . . 1.75% to 2.75% at the time and the margins were different depending on the index (LIBOR, 1 YR T-Bill & COFI) and the year they were offered. As I previously posted on this thread 1-3 times, Option ARMs had an annual cap and a life cap. The annual cap was usually 2%, which could result in neg am if interest rates went ballistic quickly (as they did in ’82/’83). However, that never happened to any of my loans. The life cap was usually 10% to 13% depending on index and year the program was offered. Theoretically, it would take ~3.5 years to reach a life cap of 10% for an Option ARM borrower currently paying 3.6% with a 2% year annual cap (assuming the index really DID go up 2% per year and I’ve never seen this happen with the Prime/Alt A Option ARM products). That’s a lot of time for the borrower to figure out how to refi or pay the loan off.
Their really isn’t anything “scary” about the older Option ARMS if the borrower was a prime borrower when they took out the loan and always paid the fully amortizing option every month.
It’s the stupid borrowers who fell down the rabbit hole head first by not paying enough in to cover PI every month (choosing opt 1 or 2) to fully amortize the loan. This resulted in periodic “surprises” for these borrowers in the form of interest rate resets on some set anniversary dates. This same group of idiots also found themselves upside-down on their loan within 1-2 years of taking it out (and even upside down on their property if they put little down). However, ALL Option ARM lenders at that time capped the total of the neg am to 125% of original loan value. The unpaid principal rising to 125% of the original loan would trigger the borrower’s payment options being removed and the neg am tacked back onto their payment in monthly increments to force them to begin paying it down (plus the months already elapsed of the missing original principal payments).
Some Option ARM programs were offered at 95% LTV BUT the borrower had to be Prime (high 700 FICO) to be considered by the underwriter’s PMI company for a 90-95% LTV program. I personally have never had to take out a PMI policy but, as we all know, PMI premiums can be very expensive (on top of PITI).
My current mortgage interest rate has never been above 7.1%, IIRC. I believe the prevailing fixed interest rate was about 6.75% – 7% at the time I took out the mortgage. It’s been a great ride following the COFI index downhill for well over half the ~15 years I’ve had the mortgage!
You need to bear in mind, however, that during the time these prime Option ARM loan programs were being offered (mid-late ’80’s thru ’02/03), the prevalent fixed mortgage interest rates were ~6.5% to 10.5%.
The COFI Option ARM programs (both portfolio and FreddieMac) were almost all assumable (buyer must qualify with lender and pay an assumption fee of $500, which includes doc drawing, I believe). Assumable mortgage programs seem to have become extinct in the past decade or so. They used to be a “selling aid” when fixed interest rates were higher.
Of course, no one knows what will happen to the mortgage indexes once a new president gets sworn in and gets to work early next year. At this stage of my life, I couldn’t give a rat’s @$$. If the index goes thru the roof next year, I can always pay it off or consider selling. I will never take out another mortgage again, unless it is very tiny (well under $100K) and 10 years or less in duration (likely seller-financed). And I would only agree to do that for a very exceptional property which I couldn’t possibly get (after wrangling) for the budget I had earmarked to spend on my retirement home.
