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The truth about Option-ARM’s and traditional ARM’s

By Doug Francis

mortgage billboard - bored.comWhat the heck is an Option-ARM and why do they get headlines?

In the Option-ARM mortgage, the borrower can decide how much she will pay each month. For example, the true Principal and Interest payment is $1,500 per month but the borrower decides to pay only $1,300 per month.

That extra $200 per month then gets added to the principal due. It adds $2,400 annually to the mortgage balance, which isn’t much when house prices are going up 10% per year.

But when the market is declining then this is a recipe for disaster. None of my clients used these mortgages and the Option-ARM product is no longer available.

OPTION-ARM’s are the single most toxic element in the existing mortgage crisis that continues to unfold across the country.

And they have tainted the reputation of traditional ARM’s… so please keep reading.

ARM is an Adjustable Rate Mortgage:
  • The Interest Rate changes on a planned schedule.
  • The interest rate is calculated using a specific published Index, such as U.S. Treasury or the LIBOR , that is published in The Wall Street Journal.
  • On the scheduled Change Date, the Note Holder calculates a new interest rate for the mortgage by adding a specific percentage to the published Index.

The language in the Adjustable Rate Rider will read something like this:

The “Index” is the average of interbank offered rates for one-year U.S. dollar denominated deposits in the London market (“LIBOR”), as published in The Wall Street Journal. The most recent Index figure available as of the date 45 days before each Change Date is called the “Current Index”.

Before each Change Date, the Note Holder will calculate my new interest rate by adding — Two and One / Quarter – percentage points ( 2.2500%) to the Current Index. The Note Holder will then round the result of this addition to the nearest one-eighth of one percentage point (0.125%)… this rounded amount will be my new interest rate until the next Change Date.

You may not know this, but the current 1-year LIBOR rate as of 9/5/2009 is 1.27% according to The Wall Street Journal and BankRate.com.

If your 1-year, LIBOR based ARM adjusted today, using the example above, then your new mortgage rate would be 3.625%.

Here is a graph showing the history of the 1-year LIBOR Index:

libor history

Filed Under: Blog Tagged With: buyer, mortgage, Refinance, virginia

About Doug Francis

A seasoned Realtor specializing in unique and new homes around Vienna, Virginia, Doug has seen consumer behavior, negotiations and communication styles change. At his original brokerage, he was the first agent to add an email address. Imagine! Outside real estate, he plays tennis, is a Washington Capitals fan, spends time with Skipper (his dog), and enjoys the restaurant scene in the DCA. He's a Boston University graduate who feels morning coffee is non-negotiable.

Vienna real estate agent Doug Francis

When we bought our house in Vienna, we were thinking about raising the kids, building an addition, and knowing the neighbors. Today, home buyers are attracted to Vienna because of the sense of community, walkability, and small town lifestyle.

So, what’s next after your 25 years? It’s a conversation many of my clients are having with me as they plan to move to the beach, travel, or get closer to grandkids. Helping them see their future, sell their current home, and move ahead with their updated plan has been an interesting new chapter.

My background: I am an active licensed agent in Virginia, have negotiated hundreds of sales contracts, work at TTR Sotheby’s International Realty in McLean, and still sell homes in all price ranges. I donate to the Town of Vienna tree replacement fund, participate in a neighborhood citizens association, and try my best to stay in shape.

Let’s discuss your moving plans: Email doug@dougfrancis.com or call me at (703) 304-6827 .  Cheers!

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About Doug Francis

I am a Realtor with TTR Sotheby's International Realty® just outside Washington D.C. in Northern Virginia. I'm licensed in Virginia with a focus on Vienna, VA real estate since 1991.

That deep knowledge is valuable, especially in today's fast-paced market where advice is critical. Although many of my clients are personally referred, I am available to help you too and am accepting new clients right now.

Feel free to contact me at 703-304-6827 or email me at doug@dougfrancis.com anytime!

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TTR Sotheby's International Realty
6723 Whittier Avenue McLean, VA 22101

Office: 703-319-3344
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