Palm Beach Real Estate and Loans

Welcome back to my deciphering of the Option ARM.

In my previous Post I explained the payment choices that you, as a Borrower, would have with the Option ARM.  Now I'll go over the good and the bad...

Remember that 1%?  OK, let's say you actually qualify for it - don't be surprised at the beginning of the second year when that goes to 1.25%, third year 1.5%, fourth 1.75% and fifth 2%. At that point you'll need to refinance the loan if you want to keep having the minimum payment option.  (There are also programs that offer a fixed 2.95% minimum for the 5 years.)

Now - what about your other 3 choices?  They're fixed, right?  Of course not!  Come on, that would be too easy.

The rates on those can change every month.  They can go down, but when you're planning your finances always assume the worst - that way, WHATEVER happens you're not caught with your pants down.  How do they vary?  They are based on various indices: MTA, COSI, COFI, CODI, LIBOR - there's no reason to get into what each one is, they just vary by the frequency of change and their individual extremes.

Alright - I've gone over all of the bad stuff.  At this point you're probably wondering why anyone in their right mind would want this particular loan!

I don't blame you - but there are a couple of very good reasons:

• One is the fact that you actually HAVE options and you can change your mind every month if you want to.  One recommended way of using it would be to pay the 30 (or 15) year fully amortized payment every month, unless there is a dip in income - say from low tips, commissions were a little light, etc. - then you could use the interest only payment to make your output lower.  Use the minimum only in an emergency.
• Or - and this is probably the best reason - if you are purchasing in an area that is experiencing ridiculous appreciation, such as what we saw in Florida a few years back.  In that case you'd get the loan, pay the minimum for as long as possible (regardless of the negative amortization), then sell the property for a big profit.  The idea being to put out as little cash as possible.  This ONLY works when things are appreciating like crazy.

So, there can be a bit of a gamble - but done in the right place, at the right time it can be very successful.

This is probably the most confusing way to finance residential property - contact me if you have any questions.

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