Ryan’s Mortgage Blog:
Beware of the Option ARM. These mortgages can get you in trouble pretty fast if you don’t pay attention. An Option ARM is an adjustable rate mortgage that typically has 4 payment options. Option ARMs became popular within the last couple of years, and lenders have recently created similar programs by changing a couple of the “options” or terms. So for the sake of this blog, I will be referring to the typical Option ARM. You can pay the min. payment, which is below the interest only rate (negative amortization), so your loan balance goes up if you make this payment. The 2nd option is an interest only payment (no amortization). The 3rd and 4th options are 15 or 30 year amortizing payments, which are fully amortizing. Usually your min. payment will stay the same for the first 12 months and adjusts annually there after.

Having 4 payment options a month can be nice, plus the minimum payment may be so attractive you end up opting to buy the bigger, more expensive house. These loans were designed for people who have variable income from month to month (i.e. sales person, small business owner, etc.). For example, one month you didn’t do good selling luggage and you opted to make the minimum payment which was only $1,500. The next month airline tickets dropped and luggage sales went through the roof so you opted for the 30 year amortizing payment of $3,000.

From what I have read, some people claim these loans were also designed for people who plan on selling their home fast (within a year or two), but I beg to differ. Many Option ARMs I have seen come with a pre-pay penalty, which wouldn’t make sense if you sold soon. You can get ones without pre-pay penalties, but it may cost you a little more in closing costs or in your rate. There are better programs available if your only concern is selling soon (3 or 5 year I/O ARMs just to name a couple).

I’d say nearly 75% of my clients that I refinance OUT of an Option ARM tell me their broker did not tell them all the facts about the loan and they felt tricked. If a broker is trying to talk you into an Option ARM, this should raise a red flag…unless you trust them completely. I would proceed with caution. Make sure they explain everything to you as well as offer you other programs. One thing some brokers “forget” to “remind” you is the interest rate is adjusting monthly. It is called an “Adjustable Rate Mortgage” for a reason. Even though your min. payment stays the same, your interest rate may be rising without you even noticing. Over the last year I have seen mortgage statements from clients where their rates increased monthly for nearly the whole year. Another problem with these programs is the rates are usually higher than the standard ARMs or fixed mortgages. Many times this is because of the margin, which is the rate that is added to the index to determine your interest rate. I have seen margins on the Option ARMS as high as 4.5, so even when the index is low and everyone else is getting good rates, your rate would be around 9.5%. Although I didn’t research the stats, I would assume rates are higher on these mortgages because borrowers tend to default more on these programs because of the negative amortization and adjusting rates. Also note, the lender will only let you pay the minimum option for a certain amount of time, otherwise you’d be digging too great of a hole in built up principle and interest.

A big problem is when you pay the min. payment your loan balance increases (neg. am.). I have seen cases where people made the min. payment for several months and before they knew it they were upside down in their new home because the value of their home depreciated, while their loan balance increased. This is obviously not a good scenario.

Don’t get me wrong these programs may be a good choice for certain people, but be VERY CAREFUL if you are thinking about one for yourself. I suggest looking into the HYBRID ARM, which is a cousin of the Option ARM. The main difference is you can get the interest rate fixed for a certain number of years, but you still have the payment options.

Many brokers may get upset with me telling you all this stuff, but as you will see, I only want what is best for my clients and that includes only offering them the truth. This is the most deceiving loan out there, and to be honest I do not recommend it to clients unless it fits their situation and they completely understand it. Every client is unique, so I don’t have a particular loan program I offer them or try to push on them…I first listen to what they want/need, and give them options based on their needs. If you have any mortgage related questions, feel free to ask me! Just so you know, we do mortgages in 48 states. My number is 805-540-0866 and my email is Ryan@GoMetroLoan.com

PS – If you are currently in an Option ARM feel free to contact me and I can help you figure out if there is anything better out there that would save you money. This is all free with no obligations…no tricks 🙂

If you looked at the Trib today, you probably read the article about January’s real estate statistics. The article started out saying that January was “typically a slow month for real estate activity”. The problem with this statement is that the statistics reported are about the activity in December since it uses Solds. Most homes closing escrow in January went into escrow in December and if they were 45+ day escrows, we’re looking at some November activity too.

My statistics use Pending sales for the month as the indicator. The chart showed that activity picked up in January. I’ll post February numbers in the next few days so you can see what the Trib will be writing about in May.

According to Trulia.com, these are the SLO County cities that were searched the most for real estate (week ending 2/14):

1. Paso Robles
2. San Luis Obispo (93401)
3. Atascadero
4. Arroyo Grande
5. Templeton
6. Nipomo
7. Pismo Beach
8. San Luis Obispo (93405)
9. Morro Bay
10. Grover Beach

If you’re a Poly Parent looking to buy vs. rent, now is a good time to look. This is the time of the year when we see homes going on the market that have been used as student rentals. While there are lots of 2 bedroom homes and condos currently on the market in SLO, some Poly parents look for 3+ bedrooms to help bring in more rental income.

Here’s a newer 5 bedroom that went on the market today at $774,900. This one even has a room with a seperate entrance.

See the home here (this link should be active on Tuesday when this MLS search updates the new listings. If not updated yet, it will say “listing not found”. )

Congratulations to the Arroyo Grande Eagles girls water polo team for advancing to the CIF Division IV championship game! They travel to Long Beach to play Cabrillo in the championship game on Monday. My daughter was fortunate enough to have played with the AG JV water polo program this year and was moved up to be part of the CIF finals. My wife and I have nothing but praise for the coaches. It has been a wonderful experience for her. I’ll be travelling to Long Beach to root for them. Goooooooo Eagles!

I recently purchased a vibration reducing zoom lens for my camera and took some photos of their games and posted them on Imagestation so that the girls and parents could order their own photos. In case you know someone on the team, here are the photos:


Here’s an article from USA Today on how the Internet is impacting the real estate market. In it, they say that the National Association of Realtors, 80% of Buyers used the Internet to help find a home. I’m not sure where they got this figure from as I haven’t seen the 2007 research reports yet. Last year, the number was 72%.

Read the article here

Ryan’s Mortgage Blog:
To go off the report Keith just posted, many lenders lowered their mortgage rates slightly last week based on the slow housing market (nationwide). As I stated in a prior blog, there was talk that the housing market may have bottomed out near the end of last year and some mortgage companies were optimistic. Well, as I also stated, no one has a crystal ball. Here is a quote I saw this morning on cnn.com:

“Last week’s release of housing starts for January showed the weakest reading since August 1997, due to the abundance of homes already on the market to purchase,” said Frank Nothaft, Freddie Mac vice president and chief economist.

The market is waiting on a few more reports to come out soon, new and existing home sales, and the second estimate of economic growth in the fourth quarter of 2006. I don’t see any drastic changes coming but I will let you know if something comes up. Feel free to contact me at Ryan@GoMetroLoan.com or 805-540-0866.