Hybrid ARMs

Every week some new bank rep will come to my office telling me about their bank, and their products. Most of these folks are usually pitching sub-prime products (how low a FICO score they can qualify for) or Option ARMs (how many points I can make originating them).

In the end I usually give them my business card and ask them to read my tag line on back of the card -"Friends Don't Let Friends buy Option ARMs".

Well, a couple of months back, a rep came in talking about a new product called a Hybrid ARM. On the surface a Hybrid ARM sounds great - (the marketing guys, who came up with the name, probably thought they could ride-share on the euphoria over Hybrid cars). Well in this case what you're buying is an Option ARM with a fixed rate. The argument these reps always gave me about Option ARMS, was that you get four options-

1. the option to pay the low monthly payment calculated using start rate of 1%-1-1.75%
2. the option to pay interest only
3. the option to pay the 30 yr amortized payment
4. the option to pay the 15 yr amortized payment.

What most loan officers always fail to explain is that under option 1, you most likely are also taking the option to go negative amortization, that the interest rate adjusts monthly and most borrowers today who have these loans are experiencing rates in high 7 to mid 8%, and these loans generally come with 3 yr hard prepays.

Anyway, so the Hybrid ARM solves the monthly adjustable part of the Option ARM, but neglects the other problems with it. So I asked what sort of rate is it fixed at. And the answer was around 7.5-8.5%. So with a Hybrid you now also have the option to be stuck with a high interest rate as well. So the reason I'm writing about this today, is that a new rep walked into my office this week offering a Hybrid ARM with no prepay and a fixed rate of 6.875%, with no points. Am I excited, no! but it's a big improvement from the other guys.

Given that most of the Option ARM borrowers try to make the interest only payment, why not make your minimum payment almost 7/8% of 1% less and have it fixed on a interest only ARM. This is where I direct my clients who want a minimum payment.