Option ARM advantages
Option ARM's the main and only advantage is its flexibility. You, the borrower must understand exactly how this mortgage product is structured. There are few cases where Option ARM has a clear cut benefit for a buyer.
First, it is easier to qualify for a mortgage as many lenders don't verify income but only assets, and with minimum payments, you can afford much more expensive home than with traditional home loans. But do it only if you are confident that you will get a major boost in you income - getting partnership in your law firm, getting out from medical school, etc. Don't do it because you think you may win a lottery soon enough.
Second, buying an investment rental property and using Option ARM to create cash flow and have a flexibility if you can't rent it. Do your math, assuming that you will have tenants paying rent only 75% of the year or 9 months. If you buy rundown properties or fixer uppers and know what you are doing, then Option ARM is the only product you ever need. Make sure you can resell them quickly.
Third, use Option ARM for debt consolidation by cashing out and paying off your unsecured debt. FICO score can be as low as 620, but you must show your income. You will have 3 months at a very low interest rate, something like 2 percent. Put you finances in order quickly and refinance after the 3 month introductory teaser rate expires. Make sure however, and this is very important, you can last for few months at the fully indexed rate if you can't refinance after 3 months. Do not accept any prepayment penalty.
Fourth, Option ARM is the best when the interest rates are going down, so the index is going down as well, and so is the fully indexed rate. That is not going to happen for a few years, but keep it in mind next time you see Mr. Bernanke lowers interest rates few times in a row.
Don't use Option ARM to flip Vegas Strip condos, Miami beach homes or Manhattan lofts. Those days are long gone and you will get burned.
Tue Jun 6, 2006 10:06AM | Copyright: www.bad-credit-advisor.com | More in Mortgage |
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