While we have discussed the workings of an Option ARM and some of its drawbacks in another article, this will focus on the positives. 

First off, the Option ARM has been thoroughly vilified by the press, as a result of its abuse by investors and seedy lenders. During the boom from '03-'06 ,the Option ARM was the most heavily advertised mortgage program on the market. If you saw a billboard touting a rate of 1% of a payment of $500 on a $200,000 loan, you can bet your neighbor's dog, that this was in reference to the Option ARM. 

The reason that the Option ARM became so popular, or abused, depending on your perspective, was that it seemed to be a win for both the lender and borrower. Borrowers were able to get into a home far nicer than they could realistically afford as a result of the Minimum payment, and Loan Officers were making as much as 4% of your loan value in commission (i.e. a $400,000 loan would net a lender as much as $16,000 in commission). This proved to be a dangerous cocktail and was one of the leading factors in our declining real estate market.

While the majority of those in an Option ARM abused the privilege by pushing the limits of what they could afford and continually only paid the minimum payment, a small percentage of financially savvy individuals leveraged the Option ARM to their benefit. Below is a break-down of why the Option ARM isn't always bad and how it can actually be better in some cases than a 30 yr fixed. 

Declining Interest Rates = Declining Payments

When people hear the word adjustable they immediately think of the payment as adjusting upwards, but with an Option ARM the payment can also decline. With rates declining to historic lows, had an Option ARM investor not chosen the minimum payment each month and had their loan not been recasted, they would be enjoying a lower 30 yr, 15 yr , or IO payment than they would have had at the inception of their loan.

Most Option ARM's use the MTA as their index of choice--currently  2009--the MTA is at an historic low of .49% !!! Yes, it deserves 3 exclamation points. Back in '06, this index was in the mid 4%'s. So, factoring in an average margin of 2.5%--the Option ARM hold is looking at a rate of around 3%--or about 2 percentage points lower than the average 30 yr fixed right now. Not too shabby. 

 A Loan that You can Modify Yourself

While the rest of the country is struggling to pay their loans and struggling with banks to reduce their payments, the Option ARM has a much lower payment already built in. Now, if you have been paying the minimum or interest-only payment from day one, you'll be out of luck. However, if you or your spouse is unemployed, the minimum payment can provide a few months of much needed reprieve, as long as it's not abused.

Great for the Smart Investor

For the savvy investor, an Option ARM can provide some additional cash flow when it is needed. Whether it is needed when buying and flipping properties or purchasing stocks, the Option ARM can provide some needed liquidity in a pinch.