Florida Home Lenders Adjust Option Mortgages, Decrease Risk to Buyers

In the face of higher interest rates - as more and more individuals face the dangers of various Florida home loan options - mortgage lenders are starting to tweak the features of popular “option adjustable-rate” home loan, used to allow borrowers to lower their monthly payments in the early years of the loan.

Adjusting the adjustable rate Florida home loans

The retooled mortgages feature an extended fixed-rate period before interest charges reset and, in some cases, an option to defer repayment of principal for a longer period of time. Florida home loan lenders say the new products allow borrowers more breathing room before the bigger payments come due. Some analysts, however, doubt the changes can actually help reduce potential defaults among consumers pinched by rising interest rates and softening home prices.

The move to ease the payment burden comes at a time when the Federal Reserve and other banking regulators are sounding alarms about the potential “payment shocks” to borrowers for exotic mortgages. With “option ARMs,” as such Florida home loans are called, borrowers decide every month whether to make a standard payment that involves paying interest and paying down part of the loan, an interest-only payment, or a minimum payment that usually isn’t enough to cover all of the interest due.

Often, the minimum payment remains fixed for 12 months, and each year thereafter it changes to reflect the prevailing rate the Florida home loans are pegged to. Now, however a borrower can opt to have the minimum monthly payment fixed for three years, five years or seven years, or until the principal due reaches 110% of the original balance. Once that “negative amortization” balance cap is reached, the monthly payment has to be adjusted higher.

Benefits of new Florida home loan package

A longer fixed-rate period makes the Florida home loan less sensitive to rising interest rates. In addition, borrowers typically have to start repaying both interest and principal once that preset balance cap is met. But such a new option-mortgage product allows borrowers to defer repayment of principal for as many as 10 years, even after the loan balance hits the 110% trigger for recasting.

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The new option mortgage, designed to provide borrowers additional buffers to handle payment shocks, has become “the fastest-growing new product we rolled out,” says Frank Sillman, head of IndyMac’s mortgage business.