Rising rates on home equity lines of credit, climbing gasoline prices, skyrocketing insurance costs and real estate taxes are giving many homeowners a case of cash flow fever.
For those inflicted, the 1 percent option arm may be the miracle pill.
Unfortunately, desperate debtors are being enticed by sometimes misleading mail, phone and e-mail solicitations. But this product is not a cure all. Only professional diagnoses of your financial condition and objectives can determine the best treatment.
Here are the basics of a typical low start rate, monthly adjustable mortgage:
Initial payment calculated at 1 percent interest
Rate adjusts monthly based on the cost of savings index plus 2.8 percent
Minimum payment adjusts only once a year
Minimum payment cannot go up more than 7.5 percent per year
Hold on there, hotshot. That sure sounds like the incoherent mumbo jumbo that's rattled off by the fast talker at the end of a new prescription drug commercial.
This mortgage definitely has potential side effects.
Most loan officers would have a difficult time properly explaining all the details. Certainly, an Internet mortgage company is not going to take the time out of its assembly line of fixed rate mortgages to discuss the possible benefits and risks of this product with you.
Worst of all, and most common, is when a borrower is enticed into this program without completely understanding what they're getting into.
Consider these figures based on a loan amount of $400,000:
Your minimum payment for the first 12 months would be only $1,100, as opposed to over $2,600 at today's fixed rates. No matter what happens with interest rates, your payment cannot go up more than 7.5 percent, or about $83 a month each year.
Fact is, if you had been in this mortgage for the last 10 years your rate would have stayed well below the average fixed rate mortgage for the same period.
The low minimum payment is no doubt the most attractive feature of this product, but the real benefit comes with the monthly payment options.
Each month you have a choice of the following:
Make the minimum required payment.
Make an interest only payment.
Make the fully amortized payment of principal and interest with a 30 (or 40) year term.
Make the fully amortized payment based on a 15-year pay off.
There are many other details to understand before you can decide if this is the best mortgage for you. The nature of the cost of savings index, prepayment penalty options and the effects of deferring interest are topics that should be discussed with a professional mortgage planner. Your home mortgage should not be a threat to your family's financial health.
Consider the truth in this saying: prescription without diagnoses is malpractice.
Daniel J. Poulos is the president of Elite Lending, at 1232 W. Indiantown Rd., Jupiter in the Shoppes of Jupiter Creek. For additional information and assistance with any home or commercial financing, call (561) 745-5575 or in Port St. Lucie, (772) 335-5556 at 1814 SE Port St. Lucie Blvd., Port St. Lucie.