Yes, I just said Option Mortgage… but I did not say Option ARM Mortgage.
I have talked to clients about this in the past and 9 times out of 10, my client has listened to my suggestion. And I am willing to bet that in today’s economic situation, they are thanking me a million times over.
So, what is this Option Mortgage? Quite simply it is a 15-year Fixed Rate Mortgage (FRM) with a 30-year FRM payment option. Whaaaaat? Whenever I have a client that wants a 15-year FRM, I suggest to them a 30-year FRM that has NO PRE-PAYMENT PENALTY and give them an amortization schedule with a 15 year payoff.
As of lately, the rate for a 15-year FRM has been almost the same as a 30-year FRM. So there is not a real savings in the interest rate like what used to noticeable. Since the rate is the same, the only difference is the amortization of the loans. The longer the term, the lower the monthly payment.
If a person takes the 15-year term, they are locked into that payment for 15 years or until they refinance or sell. If they take the 30-year term, they are locked into that payment for 30 years or until they refinance or sell. However, with the 30-year term, they can pay the 15-year term payment without penalty.
Now, let’s look at someone that took out a 15-year term FRM a couple years ago. Their payment is fixed at the higher monthly payment. Fast forward to today… money is tight. Their employer is doing some cutbacks. They did not get that Christmas or year end bonus. Whatever it is, money is tight. They still have to make that 15-year payment.
Now, let’s put that same person into a 30-year term FRM. They have been making the 15-year payment for the past couple years. Money is tight. Unlike the option above, this borrower can make the lower payment of the 30-year FRM until money starts coming back in when they were able to make the 15-year payment.
As you can see, this is a very safe option because there is no change in interest rate. There is no negative amortization. There is no real change in monthly payments. Everything is fixed. The only difference is that a borrower is acting upon their right to payoff the mortgage early without penalty and has the peace of mind knowing that if they cannot afford the payment for the early payoff term that they are not forced to make that payment.
To learn more ways on how you can take advantage of a FRM, call today.
Leave a Comment