I think it could be a little worse. Option ARMS allow you to pick a mimimum payment that doesn't even cover the interest. So every month, your balance goes up. Once it hits a certain level, say 110% of the original principal, the loan is accelerated. So lets say you have a 7 year ARM. Most people think that means you have a garanteed low payment for 7 years. But if your principal balance hits 110% in year 5, you get a letter saying your payment is going up next month. That new balance is amortized at the new rate, so this can be a huge increase in the payment.
Btw, these aren't really "New". They have been around for years and were orginally marketed to people who needed low payments for most of the year and then could make a large principal payment. Farmers, doctors, ect...
Just as I said on May 19th, this is going to create another huge WAVE of FORECLOSURES. And people actually think a bottom is nearing in housing, complete idiots. You will be able to buy houses 20%-30% cheaper 18 months from today. Forums âºâº Main âºâº Economics âºâº Option ARMS. $500B-$750B going to "RECAST" Post A Reply S2007S Registered: Aug 2006 Posts: 8411 05-19-09 03:06 PM Started with a simple definition so that many can understand that this is the next problem banks, housing and the overall economy are going to face. What is an option ARM? The option ARM is an adjustable rate mortgage with "options." You can choose whether to pay on the principal. You can even choose how much of the interest to pay. Which means you can get a very low house payment. At first anyway. As with all such home mortgage loans, the introductory period ends and you eventually have to start paying on the principal (and the interest you have been putting off). This means that you mortgage payment goes up quite dramatically. The option ARM is basically another way for someone to "afford" a home that would be otherwise unaffordable. This is, of course, why the whole subprime lending crash thing is happening in the first place. And the option ARM could be the next thing to go. All of the problems associated with these "creative" home mortgage financing solutions is why I am fond of the boring fixed rate loan rather than the adjustable rate mortgage in any form. Edit/Delete ⢠Quote ⢠Complain
Obviously the market couldn't care less about this stuff. So you guys can post all you want about it, but the market has clearly sent a message that we're going up. Why not ride the wave until the wave crashes? That's what surfers do.
Time will tell, just because the market is ignoring it today doesn't mean we cant see new market lows within a month or 2. The only reason why we are going up is because of the trillions the fed has pumped into the market, if they had not done such a thing the dow would still be trading under 7000, probably below 6000 by now. Stop convincing yourself that good times are ahead, they are not, they are at least a long decade away.
You completely missed my point. I'm not talking about two months ahead. I'm talking about today. And yesterday, and the day before - when taken together they indicate a TREND which should be played. Once that Trend ends, then look to go short. But why stand in front of the train with all the doom and gloom chatter? Is it ego? The market wants to go up. If you think it shouldn't, you're welcome to risk your (imaginary) trades in it.
This rally looks like it's out of steam. The markets may start caring about the real world and commensurate economy sooner rather than later. I always believed 50% or more of the rally was due to a giant short squeeze, anyways.