Why Your Option ARM Can Cost You An Arm And A Duplex

Many duplex and single family home owners may be sitting on a ticking bomb and not even be aware of it.

The TNT beneath them is their financing.

An estimated 1.3 million borrowers took out $389 billion in mortgages between 2004 – 2005. Eighty-eight percent of all option ARMs originated between 2004-2007.

What’s an option ARM? It was a type of 30-year mortgage that initially gave borrowers four monthly payment options: a specificed minimum, an interest-only payment, one that was reflected a 15-year amortization or one that was in keeping with a 30-year payment amortization.

Whenever the buyer made the specified minimum payment, it was typically less than the amount of interest that was accruing. The difference between the minimum and the interest was tacked on to the end of the loan, meaning the loan grew in size as a result.

These payment options were typically available only for the first two, three or five years of the mortgage.

According to Credit Suisse, many of these loans are scheduled to reset between now and 2012.

In fact, in a single month in 2011, $18 billion in option arms and $27 billion in subprime mortgages will reset.

This grouping also includes many no documentation and interest only loans. “No Doc” loans accounted for four out of every 10 loans in 2006-2007.

A “no doc” loans were originally intended for self-employed, unemployed or seasonal workers, who often have difficulty qualifying for the stricter requirements of conventional mortgages.

When all of these loan types reset, property owners may discover their payments have jumped anywhere from 63 to 300 percent; which will cause many to default.

What then?

If you bought a duplex during the heyday of exotic financing, the first thing you should do is call your lender. You may discover they are willing to talk with you about converting your mortgage to a more traditional type of mortgage.

If you have equity in the property, you may also discover you can refinance.

However, if you owe more than the property is worth and can’t make the new monthly payments, it may seem like letting the property go back to the bank is the only logical thing to do.

But remember the consequences of foreclosure. A short sale won’t have nearly the impact to your credit report, nor bar you for nearly as long from owning a home or another income property.

There are ways out and as always, I’d be happy to help.