Got a mortgage refinance quote: Too good to be true?

Options ARMs are ideal for rich people who has enough money to pay off the loan anytime, but wants to use the introductory low interests rate to delaying paying off the property.

While the loan is delayed to be paid off, he or she can use that money to invest else where.

Options ARMs, for less wealthy people, are double edged swords. If things continue to be fine, then everyone happy. If housing market continues to slump, then those home owners will face larger debt with no equity and lower housing price. The worst combination of all.

People have this misconception that paying off mortgage bills are adding equities to houses. However, mortgage payment consists of two parts: interests and principal. Interests are like rent, which doesn’t add to the equity to your house. It simply disappear as your pay it.

Most people who apply for Option ARMs are those who can’t afford paying the principal. So, they can only pay the interests, which is like paying rent. The worst part is, …. the amount is usually larger than rent.

For example, let’s buy a $ 500,000 condo with 0% down and apply interests only loan (just like renting a place). Mortgage payment would be $ 3250/month. It is a bad buy, because you can enjoy same property for $ 2000/month.

Please note that I assume the tax benefits from home cancel out fees from home association and property tax. For more accurate calculation, consult with your CPA or accountant. But NOT your realtor, whom will say anything to get the deal to go through.