Callers and prospective clients often ask me, “Would you put your mother in an Option ARM?” I used to point out that my mother made two mortgage payments a month on a 15 year mortgage and paid it off in 10, because she knew she was going to live in her house forever. But when it came time to cash out to make some major home improvements on her beautiful old Tudor, we selected an Option ARM. A very different kind of Option ARM.
Many of you have read our articles about the Hybrid Option ARM or Fixed Option ARM mortgage. The phones at both East and West Coast offices have been ringing so much that the owner of the company is even fielding calls from customers on his personal number due to all the volume overloading the lines (you might get lucky and get him if you call, he waives application fees for anyone who gets him directly). Just like the hundreds of callers who reach out to us each day, my own mother saw the sense in the Hybrid Option ARM value proposition.
That’s because unlike a standard Option ARM, the Hybrid has a fixed interest rate and payment for a period of time ranging from 3 to 10 years, and even after the fixed period is over most of them retain an interest only option. Now they don’t have 1% start rates, but they do start anywhere from the high 3s (for excellent credit like my dear old mom) to the low 5s or equivalent. You can generally expect a minimum payment option on a Fixed Option ARM to have a payment of about 55% of the interest only payment at the rate of the note. In my mother’s case, she locked in for 10 years and was able to pick up $100K for home improvements and debt consolidation for a monthly minimum payment of about $275. That’s equivalent to the fully amortized payment on a loan of the same size with Zero Percent Interest. You heard me right.
Of course your mileage will vary with your credit history and the amount you are borrowing with respect to the appraised value of your property, but if you have a credit score of 620 or above and have at least 25% equity in your home, you probably qualify for this type of program. It’s not quite as cheap as the start rate on the Option ARM, but it is a lot easier to understand and more stable to boot. The payment is fixed for a period of time, as is the interest, and you can make payments to principal whenever you want just like a regular Option ARM, but without the monthly rate variations. And it has a 15 year equivalent payment option on the payment coupon. Guess which one my mom likes to use?
If you guessed the 15 you’re right, but now that she’s on a more limited income than when she was working, having the flexibility to make a minimum payment when necessary helps her during expensive seasons, like the Holidays (spoils the grandkids like you wouldn’t believe), or my Dad’s birthday! And with the cash she pulled out, all of her credit card debt has been paid off and consolidated, so her monthly expenses have actually decreased, even though she’s been able to upgrade all of the floors, fittings and furnishings with the balance of the money.
She loves it. I love her. Hey she’s my mom. And if she’s happy, I’m happy.