Saved from Foreclosure by an Option-Arm Mortgage?

December 10th, 2011
Home underwater in Steamboat

Home underwater in Steamboat

Logic and Bloomberg businessweek would say you’re in trouble if: you signed a 5-Year Option-Arm (Adjustable Rate Mortgage) 5 years ago when the real estate market was booming. Today you’re upside-down in your home and you just lost your job. But that’s not necessarily the case and that dreaded option-arm just might be the saving grace.

Example: Dan and Kathy have 2 kids and live in Steamboat Springs. Dan had a steady job for 6 years but was just laid off.  Not good you say. But there might be hope.  How so? Well if they’d signed a traditional 30 year fixed mortgage 5 years ago, and they were locked in a fixed interest rate that now they can’t afford given their employment situation, they’d be facing foreclosure for sure.Fast forward 59 months: Kathy is a stay at home mom with two year old twins and Dan just lost his job. His severance pay ended 2 months ago, the safety reserve savings are just about gone, the home is upside down and paying their mortgage is getting tough.  If the current mortgage payment was “fixed” and set to continue for another 25 years, foreclosure is likely. However, they purchased their home with a 5 Year Option-Arm and in another month it will be their 5th year. Thus, there’s interest rate on their mortgage is about to change. But this just might save them.  Instead of going up, like we all thought would happen, their interest rate is adjusting down – a lot. And their mortgage payment are about to be cut almost in half.

This means if Dan accepts the part time job that he was just offered and Kathy gets a part time job over the holidays and through the ski season, they should be able to make ends meet and keep themselves out of foreclosure. Will it be easy – no, but they are committed to the American dream of home ownership and with a family to raise, they are willing to buckle down now knowing that Dan should be working full time again by next summer.


Steamboat foreclosures

Steamboat foreclosures

So while there’s risk in any home loan “option” alternative, in this case the market dynamics are working in favor of the risk takers of 5 years ago. I would venture a guess that there might be a good number of folks out there that with a little planning and tightening of the reigns, will be able to avoid foreclosure because their 5 Year Option Arm can actually save their homes too!

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