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Beware of Option-ARM mortgages. They
are heavily promoted, but should rarely be used. I recently received
an email that perfectly illustrates how overly zealous mortgage
brokers push these dangerous products. Knowing their deceitful
tactics will protect you.
‘Carrie’ is from Washington, D.C. She sent me an email because she
recognized the dangers of Option-ARMs after reading my recent
articles at http://www.guardingyourwealth.com. She and her husband
have one and are going to refinance before there rate goes up even
further.
Carrie and her husband have a home worth $900,000 and owe $340,000
on it. Their credit score is very high and they’d like to get rid of
their 5.9% Option-ARM and refinance with a fixed mortgage. Her
problems started when she contacted a mortgage broker…
Carrie explains: “A zealous mortgage broker tried to get us to
refinance into another Option-ARM. My whole purpose in wanting to
refinance was to ditch this loan and get into a 30 yr. fixed
mortgage before rates really go up, which I assume is a reasonable
assumption.”
I want to show Mr. Zealous Broker’s reasons because I have heard
other readers all across the country tell me the same thing. Carrie
continued, “Mr. Zealous Broker's rationale on why we should
refinance into another Option-ARM is as follows:
1. Since we have so much equity in our home, we should take an
additional cash-out of $100,000 and "invest" that money for the long
term.
2. He asserts that we have made a mistake in paying the fully
amortized principal and interest option payment each month. Instead,
he says we should only make the minimum payment despite the fact
that this results in negative amortization. [Negative amortization
means the amount owed increases each month!] He says that making the
minimum payment each month and taking out the $100,000 to invest is
a smart move because we will ‘create wealth’.
3. It is unlikely the value of our house will decline in the future
since the Washington, DC metro area housing market has always been
fairly stable and strong.
4. Negative amortization is not a problem since we will never pay
the house off anyway. The best thing to do is to refinance every 3
years with an Option-ARM at a lower rate. Our decent financial
situation allows us to be able to do this.
5. It is not problematic if the interest rates on the Option-ARM
rise since the rate on our investments will most likely rise as
well. “
Carrie concludes, “I am trying to keep an open mind but I can't help
but wonder if a) this guy gets paid more on Option-ARMs, and b) it
services his commission to have us refinance our Option-ARM every
few years. Also, despite the potential to "create wealth" by
investing the cash, I do not wish to have a huge mortgage debt as we
approach retirement in 15 - 20 years.
Am I missing something? I am no financial genius but something
doesn't seem right. I would appreciate your insight since this
broker has confused me to the point of needing some financial
therapy!”
I responded…
“Well the doctor is in! First, you are absolutely correct in your
take on the situation. This investment philosophy is being heavily
promoted by some 'wealth management' strategists because of the
commissions it generates. The only thing that surprises me is that
Mr. Zealous was only suggesting you take out $100k (why not more?)
and that he isn't suggesting you put it into an equity-indexed
annuity or equity-indexed life insurance!
It is a waste of money to refinance your mortgage every three years.
It is also untrue that if mortgage rates increase that the amount on
your investments will go up as well! Has he ever heard of a
recession?
Run from this advisor and anyone else recommending you leverage your
home for the potential of a greater return on investments. You are
earning 5.9% on the equity in your home right now with zero risk.
Refinance into a fixed mortgage or a 10/1 ARM.”
Carrie took my advice and is now working with a reputable mortgage
broker. Here’s the point—when dealing with your finances and your
gut tells you something is wrong, listen!
Have a financial question? Send me an email and I’ll personally
respond, free of charge. Go to http://www.guardingyourwealth.com and
click on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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