February 26, 1999

Option ARM a pretty good option

By TOM KELLY
The Real Estate Advisor

I've always stated that I'm a pay-it-off kind of guy when it comes to home loans. I believe there is a huge benefit, financial and philosophical, to owning the roof over your head.

In fact, most financial planners on this planet will tell you folks simply don't focus on stashing away retirement dollars until the loan on the family home is paid in full. With the cost of living, coupled with mortgage payments, where do you gather extra cash to be used down the road?

I have also subscribed to the belief that average consumers should never invest money they can't afford to lose. For example, I cringe when I hear of folks taking the monthly grocery money and plunking it down on the latest Internet stock.

However, my own road to financial sense is now strewn with potholes. The four children need more social and school related cash -- even in public education -- not to mention growing appetites at meal time. The situation will be compounded in the fall when the oldest heads off for college.

That's why a new Washington Mutual loan program that offers the flexibility of paying more or less each month is an attractive option.

The "Option ARM" plan gives the borrower more choices over monthly payments each month, thus providing an opportunity to "flip-flop" payments according to household cash flow. After the initial start period, customers can select among four payments plans each month during the life of the loan. Borrowers are never locked in to one specific payment or amount, leaving open the possibilities of pulling back during a money crunch or shelling out more after an unexpected windfall.

Sure, all lenders will let you prepay, but few will permit you to underpay without dire consequences. Here are the options in a capsule.

• Minimum Payment. A very low payment that leaves you more cash during lean months. However, at times the payment amount may not be enough to cover the interest portion of the loan. If so, that amount would be added to your original loan.

• Interest Only Payment. Still a low payment, yet you pay only the interest portion and any deferred interest that may have accrued. While you do not reduce the original loan amount, you do not "go backwards" or owe more than you borrowed.

• Regular Payment. This is a common, 30-year, fixed-rate loan payment. When you choose this option, you pay all the interest and principal needed to pay off your loan on time.

• Accelerated Payment. This schedule would pay off your loan after 15 years. The payment is higher, yet you save substantial interest dollars while gaining equity faster.

Why, you ask, would you ever take out a loan where you owed more than you borrowed after a few years? In a perfect world, when you had all the money you needed when you needed it, you would never subscribe to such a deal.

But think about it. Will you have to refinance the house -- or at least consider a home equity loan -- to send kids to college? Or put mom in a nursing home? Or attend that mandatory family reunion? Well, here's a vehicle that could shortcut that extra financing step by giving you more immediate control over cash flow.

"This probably would not be the loan for a person who planned on making just the minimum payment every month," said Margaret Kyle, Washington Mutual senior loan consultant. "It's a great program for borrowers who really might use the flexible payments."

More than a decade ago, Washington Mutual was the first local lender to introduce a program that blended installment debt and a home mortgage secured by a first deed of trust. Like all programs, "Buyer's Choice" had pluses and minuses. The good news was that it was a genuine attempt to wrap high-interest, credit-card debt into the lower rates brought by first mortgages. The problem was that it confused not only consumers but also the loan officers trying to explain it.

The Option ARM is more flexible and useful. It is available for homeowners and investors and carries a start rate as low as 2.95 percent. But be careful out there. If you need extra cash "just to tide you over" a few months a year, this could be a great loan instrument for you. But get out of the minimum column as quickly as possible.

And, if the Ned Devine in your life leaves you an unexpected share of the lottery, plunk a bunch of it down on the roof over your head.

Previous columns:

• On a roll: Realtor puts office on wheels, 02-19-1999
• Free rent: 8 years and counting, 02-12-1999
• Bill would help seniors lower their property tax, 02-05-1999
• Virtual site tours go interactive, 01-22-1999
• A look at future of housing markets, 01-08-1999
• Economist warns real estate industry to prepare for Y2K, 12-24-1998
• Realtors get the sales pitch, too, 12-18-1998
• More home shoppers fall into the Net, 12-11-1998