"Option ARM"s were called "NegAm"s before we lenders realized it was dumb to market the cons of the product... (The balance grows) Why not highlight the pros and market it as an "Option ARM" instead....?! (The borrower is given several payment options) In the end ALL loan are just financial tools, they are not good or bad. But just like any tool the user must be educated on how & when to use the tool. Give the hammer to a contractor and he can build a home. Give the same hammer to a baby and he can end up very injured.
Void of any marketing spin, it is simply a "deferred interest" loan that requires a good understanding of the product's potential risks and behavior over time.
If your client is being offered an Option ARM because that is the only way he can afford the payments and there is no reason to believe he/she will have a substantial increase in income/assets in the next 2+ years, then get a better loan officer if you care about developing your referral base. The real estate agent will always be linked in the buyerâ€™s mind to the proper fit of the loan, regardless of whether or not the agent referred the loan person. Of course your job is to guide, advise, and protect the buyer in their mind â€“ not just locate and negotiate. I have lots of people refinancing out of Option ARMs who talk about the agent and the loan officer with the same tone.
As long as the loan officer takes at least an hour describing how the product performs as compared to the buyerâ€™s other options in relation to cash flow, dealing with the recast, any applicable prepayment penalty in dollars, and the accruing balance, then the following instances are situations when an Option ARM may be a good choice: (I draw pictures, use lots of easy to understand analogies, ask the borrower to paraphrase easily confused concepts, and finally ask them to sign disclosures that highlights the potential risksâ€¦ )
â€¢ An Option ARM may be good for long term real estate investors (buy & hold philosophies) who purchase in a market that exhibits leading economic indicators for 2 or more future years of strong appreciation. (He can buy several appreciating homes â€œbreaking evenâ€ on an Option ARM rather than 1 negative cash flow on a Fully Amortized or 1 breaking even on an Interest Only)
â€¢ An Option ARM may be good for short term real estate investors (flipper philosophies) who purchase in a market that is currently and strongly appreciating. (He can buy a fixer-upper and use all his cash to rehab it for a quick sale)
â€¢ An Option ARM may be good for a homeowner who cannot afford the home they want and has strong reason to believe that their income will substantially increase in the next couple of years, and they do not want to wait until that time to buy their home.
â€¢ An Option ARM may be good for a homeowner who has strong reason to believe that their assets will substantially increase in the next couple of years, intend to use those funds to pay down the balance and refinance into a more conservative loan at that time, and they do not want to wait until then to buy their home.
â€¢ An Option ARM may be good for a homeowner who has plenty of cash flow but is self employed (or an investor) but can earn a higher ROI in their other business dealings than the cost of money on the Option ARM.
For your buyers that do not fit one of the situations above or anything similar, but are being sold an Option ARM because they simply need a lower payment, my advice you would be to encourage the loan officer to look at getting them into an Interest Only loan and buying down the rate with seller closing costs if need be.
My favorite right now for a lot of borrowers is a 7/1 ARM, Interest Only for 10 years, No Prepayment Penalty, an ULTRA LOW 1.5% Margin (this directly impacts the rate if you hold the loan past 7 years), at 5.375% if your buyer pays a discount of 1.5%. This is a truly excellent and â€œsafeâ€ loan that goes to 100% (when we can find a 2nd that works for them) and delivers high client satisfaction and lots of referrals. It requires a 700 fico for Stated and 650 for Full Doc. It requires No Assets for either full doc or stated income... Awesome, true!!!?!!!
1 - Small Business owner and cash flow is very important for you
2 - Buying a home with build in Equity,
I have several Investors that use this method currently