Are Denver Adjustable Rate Mortgages (ARM's) Worth it for Denver Residents

In general with the state of the nation and the economy today, we are finding that borrowers are looking for more stability and certainty in their mortgage. They want a consistent monthly payment so they can budget and make good sound financial decisions with their money. However, there are loans out there that offer cash-flow and cash- management strategies that are great for some but NOT for others. It is important to know the difference.

You have heard the ads I am sure:

The Power Fixed ARM, The Magic Mortgage, The Pick a Payment Mortgage etc…

They are all a variation on something that is referred to in the industry as the OPTION ARM. This loan offers a fixed payment for a fixed period of time. (ususally 12-60 months)  Do NOT be fooled, there is nothing fixed about this loan for the long term. In fact, the APR can actually change monthly if the market fluctuates.

This is a deferred interest loan that typically has a start rate of 1.25% to 2% depending on the loan to value, occupancy, credit score etc… There is an index and a margin associated with each loan and they are added together to determine the APR and the interest only payment for the mortgage. The indexes can vary from MTA, to COFI, to LIBOR. The margin is based on your level of risk - the higher the lender perceives the risk, the higher the margin.

For example, if you borrow $200,000 and have a start rate of 1.25% (this assumes an 80% LTV, good credit and verifiable income) your minimum monthly payment will be $666.50. This payment is guaranteed for 12-60 months depending on the program you choose. The interest only payment will be calculated based on the index and margin mentioned above. (again assumes an 80% LTV, good credit and verifiable income) Let’s use the MTA index at 4.13% and the Margin at 2.95% for today. That is an APR of 7.08%. The interest only payment is $1,180.00. The 30 year payback would be $1,341 per month principle and interest at 7.08%. The 15 year payback would be $1,806 per month principle and interest at 7.08%. You can "pick" the payment you would like to make that month.

So, let’s assume you choose to pay only the $666.50 as the minimum payment required. The interest payment is $1,180. What happens to that $513.50 difference? It is called deferred interest and it is added to the balance of your loan - you defer the payment until later. "Later" being defined as, when you refinance again or sell the property. After having the loan for 1 month you would owe $200,513.50 and if you do the minimum payment next month too, you may owe $201,027 or more - because the APR could change - at any time - therefore increasing or in some case decreasing the interest only amount due. There are caps and ceilings on the total amount of the adjustments but they can reach well over 9.95%.

Mortgage brokers are paid well on these loans and try to sell them to everyone. They are NOT for every borrower. Most carry prepayment penalties that can really tie someone to a home and in a fairly flat apprecation area it could spell trouble! Property investors buying rentals and borrowers wanting 2nd homes are perfect for these types of loans. Typically, they are looking for long term investment and cash flow. These loans provide that but not stability!

These loans are available for credit challeged situations over 80% LTV and stated income loans, however the start rates and margins are increased!

The product portfolios are very diverse these days and the lenders are trying to offer programs to meet everyones needs. If you decide you want an Option ARM, make sure to ask the right questions and monitor your mortgage monthly! For mor information on ARM’s in Denver, visit www.almcmortgage.com or call Cheryl Twesme at           303-696-6933.

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