Quote:
Originally Posted by stomachmonkey
You need to ask the bank to spell it out.
But to me what it means is if you start with 3% and prime goes to 6% within the year on year two your interest rate will be 5% but you'll only pay 3% for the next four years but the extra 2% will be added to the back end. Rinse and repeat for a max increase to 9% over the lifetime.
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That sounds like an option ARM and would be a disaster for all but the savviest of real estate investors. Option ARM's are a large part of why we're in the mess we're in now - people didn't know what the hell they were getting into and/or just assumed their houses would appreciate fast enough to refi out of the negative equity when the time came. It's similar to walking into a used car dealer and saying you can afford anything as long as the payments are real low.
Just make sure you know the terms - index, margin, caps and adjustment periods.