Poway Seller, In response to your question concerning the resetting or what is commonly referred to as the recasting of a an Option ARM loan, here is what is happening.
An Option ARM loan with potential for Negative Amortization has a reset when the principal amount of the loan reaches 110% to 115% (based on the lender's guidelines) of the original principal that the borrower refinanced or financed at….
For example, you refinance into an Option ARM loan with an at the time balance of 400,000. Every month you defer when you make the minimum payment. Let's say you make the minimum payment and the difference between that and the fully amortized Interest Only payment is $1000.00 per month / so $12,000 per year in deferred interest.
In three years and 4 months, if you have a 110% guideline with your lender your principal is now $440,000 and the loan recasts without the minimum payment option available… This is the reason for the early recasting.
These loans are risky and potentially dangerous but they do and better yet "did" have a place for borrower's and investors. A bomb or explosive device, if used properly, and applied in the right manner can be used for good but if in the hands of someone not understanding it's potential…this is obviously dangerous….
By the way, There are "hybrid" Option ARM's now with a 5 year fixed minimum payment and a five year fixed fully amortized rate. We are moving many people into them from the standard Option ARM as a safer alternative, although I prefer to see people in at least a 7 year Interest Only product if they are going to refinance or buy…
