People who call and want to do business with me often ask, "Would you put your mom in an Option ARM?" I used to tell people that my mom had a 15-year mortgage but paid it off in 10 years because she knew she was going to live in her house forever. But when it was time to get cash out to make big changes to her beautiful old Tudor, we chose an option adjustable rate mortgage (ARM). A type of Option ARM that is very different.
Many of you have read our articles about the Hybrid Option ARM mortgage or the Fixed Option ARM mortgage. The phones at both the East Coast and West Coast offices have been ringing so much that the owner of the company is taking customer calls on his personal number because the lines are so busy (you might get lucky and get him if you call, he waives application fees for anyone who gets him directly). The Hybrid Option ARM value proposition made sense to my mother, just like it does to the hundreds of people who call us every day.
This is 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. Even after the fixed period is over, most of them still have an interest-only option. Now, they don't have start rates of 1%, but they do start anywhere from the high 3s (for people with great credit like my dear old mom) to the low 5s or equivalent. Most of the time, a Fixed Option ARM with a minimum payment option will have a payment that is about 55% of the interest-only payment at the rate of the note. In the case of my mother, she locked in for 10 years and was able to get $100,000 for home improvements and consolidating debt for a minimum payment of about $275 per month. That's the same as making the full payment on a loan of the same size with 0% interest. You did hear me.
Your chances of getting this type of loan will depend on your credit history and how much you want to borrow compared to how much your home is worth, but if you have a credit score of 620 or higher and at least 25% equity in your home, you probably qualify. It's not as cheap as the Option ARM's starting rate, but it's much easier to understand and more stable. Both the payment and the interest rate are fixed for a certain amount of time. You can make payments to the principal whenever you want, just like with a regular Option ARM, but the rate won't change every month. On the payment coupon, you can choose to pay it off over 15 years. Which one does my mom prefer?
If you guessed 15, you're right, but now that she's retired and has a smaller income than when she worked, being able to make a minimum payment when she needs to helps her get through expensive times like the holidays (when she spoils her grandchildren like you wouldn't believe) or my dad's birthday. And with the money she took out, she paid off and consolidated all of her credit card debt. This means that her monthly expenses have gone down, even though she was able to upgrade all of the floors, fixtures, and furniture with the rest of the money.
She enjoys it. I love her. She's my mother. I'm happy if she's happy.
