Why Option ARMs are Not a Good Idea..

There are lenders out there advertising interest rates as low as 1%. Borrowers beware! This is total nonsense. There's an old saying: "If it sounds too good to be true, it probably is".
The Option ARM is a gimmick loan that is sold in such a way that it takes advantage of the borrower's lack of knowledge.

A few reason's why I think the Option ARM is a bad idea:

1. Negative Amortization - If the borrower pays the minimum payment every month the balance of the loan will increase. The borrower will owe thousands of dollars more on their home in a very short period of time. This is because the interest rate the borrower actually signed up for - is much higher than the teaser rate they think they are paying.

2. Your interest rate is actually higher than what you could have gotten on a conforming loan. The low teaser rate you get - is only a portion of the interest that's actually accruing on the balance of your loan. Typically - Option ARM loans have a combined interest rate of at least 8.25%, but most are even higher than that.

3. Because the loan balance continues to rise over time, the borrower's equity decreases. So - you are left in a worse place financially in the long run.

How Real Estate Firms and State Associations are Confusing the General Public

If your are a potential home buyer - please be aware that agents and their companies are prostituting the term "Exclusive" - by sometimes calling themselves an "Exclusive Buyer Agent" or having you enter into an "Exclusive Buyer Agreement"

The official definition from NAR back in the 1990s is that an Exclusive Buyer Agent never lists property for sale - nor does their company - to avoid the conflicts of interest that typical "buyer agents" have. The term "Exclusive" is critical - because the meaning is just that --- exclusively representing buyers.

A traditional buyer agent - can offer you no more than Exclusive Right to Represent Agreement (which means that they are the only agent that is representing you) - which is a far cry from an "Exclusive Buyer Agency Agreement" which means that you are working with an agent that is representing you, but that they and their office never represent sellers. BIG DIFFERENCE.

When they dilute the meaning of the term "Exclusive", and confuse the general public - no one can understand the difference in the type of representation that is offered.

In fact - under an Exclusive Right to Represent Agreement-- that agent may only be temporarily "designated" to represent you. If you become interested in one of their own listings- they suddenly don't represent you anymore -- either declare dual agency on you - or shuffle you off to another agent in their office for you to work with ("Designating them") -- who you may not want to work with at all.

At that point - that agent that WAS supposed to be representing you - is not supposed to tell the seller what they know about you...but at the same time, they are legally representing the seller and working in their best interest. So - as a consumer - can you see the problem here??

I hope so.

And what you - as a home buyer - aren't told - is that every other agent in that agent's office is your adversary....and that there could be overheard phone conversations, that there are shared fax machines and file cabinets, and that your agent may have biases towards showing more in-house listings or worse - their own listing -- because perhaps they get a bigger commission split if they push an "in-house" listing on you. Agents don't disclose these 'issues" to you.

When you understand that this can happen with a traditional agent - and that you get better representation from an Exclusive Buyer Agent for no extra cost (everything is built into the transaction) - using an Exclusive Buyer Agent when you are buying becomes a "no brainer."

Unfortunately - as a home buyer - you aren't told upfront what an Exclusive Right to Represent Agreement really means. And worse yet - most buyers in Illinois sign no agreement at all. This means that agents have carte blanche ability to deceive you. Across the US (and in Illinois) there is less than a 12% disclosure rate.

If you have no contract with an agent - they are supposed to disclose that they might suddenly not be representing you at one point -- upon first contact with you (or if you sign an Exclusive Right to Represent agreement with them - within that agreement) but since most buyers don't have a contract with an agent in Illinois - most of the agents are disclosing this fact way too late -- contract signing (which isn't legal).

Consumers deserve better...

Loan Rate Buy Downs - Working Well

We recently had a buyer client get a rate reduction from 6.25% to 5.5% by having the seller pay points, and we also had all their closing costs paid (& nothing out of pocket to us) - and nice "price off list"

Lets use an example.... For about $18,000, a seller can permanently buy down the interest rate of a $450,000, 30-year loan a full percentage point, shaving $289 a month off the buyer's mortgage payments. That assumes a 10 percent down payment on a $500,000 home, with a 6.5 percent interest rate before the buy-down. In order to give the buyer the equivalent savings through a price reduction, the seller would have to cut his/her price by $45,800.

As a rule of thumb, a seller would need twice the price reduction to equal the buy-down's advantage in savings per month for the buyer. Thus - it is a great thing for us to propose to sellers, for our buyer clients.

Once fairly commonplace, buy-downs all but disappeared during the boom years in the housing market, when interest rates were falling, prices were climbing, and sellers in many regions could count on receiving multiple offers.

You know - if you mention buy-downs to a group of Realtors or loan officers, half of them won't know what you're talking about. It's pretty funny. I guess that shows how long I've been around... Of course - I also remember when there were assumable loans :-)

I talk about buy-downs during our initial consultation with a buyer client. We can show the buyer the difference this makes to them in their monthly payment. We tell them - don't worry about rates in the 6's -- we can most likely get you rates in the 5's due to our negotiation abilities. We can magically "put you back to the time" when rates were the best.

Interest-rate buy-downs can be permanent or temporary. Sometimes - they are phased out over three years, while other times - they are phased out when you reach the time when the ARM will adjust.