As the housing and mortgage industry in the United States continues its descent, here comes yet one more product to add fuel to the fire: the option payment mortgage.
Even worse than the infamous “no interest” mortgage, the option payment mortgage is a combination of many types of mortgages. It can be a 15-year mortgage, a 30-year mortgage, an adjustable rate mortgage, an interest-only or a partial interest-only mortgage. It can be your dream mortgage. It can literally be whatever you would like it to be. What it’s not, is a good idea.
The option payment mortgage will allow homeowners to choose one of four payments each month, ranging from the low end (a partial interest payment, where only a portion of the interest is paid and the remainder is applied to the principle balance of the mortgage where it continues to earn additional interest) to the high end (a 15-year amortized payment). Each month, homeowners can choose which payment they would like to make.
Supporters of the option payment mortgage say it allows homeowners to afford a home of higher value where they can earn more equity, and it allows flexibility for those homeowners who have an adjustable self-employment income. Proponents say that with house appreciation rising as fast as it has in past years, a negative amortization will not necessarily impact homeowners.
Products such as the option payment mortgage are the reason that the real estate market is finding itself in such a crisis. First, homeowners are extending themselves to purchase a home that is well beyond what they can truly afford. Not only will they need to make the payments, but if they’re moving to a high-end neighborhood, more than likely they’ll have higher real estate taxes and home association fees as well.
In addition, the initial APR (annual percentage rate) is only a “teaser” rate to get the homeowner in the home. It could be as low as 1.0%, which provides for a very low payment. However, the APR is always adjustable for the option payment mortgage and can adjust at any time. Where does this leave homeowners? It leaves them struggling to pay the partial-interest payment (which increases the balance of their mortgage) or unable to pay the 15- or 30-year amortized payment.
With the option payment mortgage, the mortgage industry is banking on the fact that real estate in the United States will continue to appreciate as quickly as it has in the last ten years. As foreclosures increase and home prices decrease, many families are finding they are now stuck in a home that is no longer worth what they owe, and they cannot afford to sell.
No matter what way you look at it, the option payment mortgage is not at all a good option.