Boy, option ARMs are very risky loans. Here’s more from the Business Week article.
Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization. And once balances grow to a certain amount, the loans automatically reset at far higher payments.
I normally don’t trust any number preceeded by “up to” but what the heck.
Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules — often to the astonishment of people who thought the low installments were fixed for at least five years.
The big problem is the borrowers didn’t understand the option ARM loan.
Again, I can’t emphasis enough the importance of finding a lender you trust. Lending is so complex, a lender can really stick it to you and you may not find out until years later.
But the best available estimates show that option ARMs have soared in popularity. They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year, according to FirstAmerican LoanPerformance, an industry tracker.
Most people should avoid option ARMs.