Foreclosures, ARM's, and the BIG Mistake

See the L.A. Daily News article on Report Hits Close to Home, posted in the Real Estate News Section of my website.

The San Fernando Valley had the highest number of foreclosures in L.A. area during April 2007. Twenty-three homes were lost to foreclosure and 289 properties were in some stage of the process.

And if you read the book Sell Now, by John R. Talbott, you get the feeling "you ain't seen nothin' yet". Talbott's expecting a huge wave of more foreclosures to come and he blames in part the rampant use (abuse) of Option ARMs. He's right in the context he's referring to, i.e., that people have been buying homes they could never have otherwise afforded, and never will. Now they're paying the piper. And by making the unaffordable artificially affordable, we've managed to inflate the entire housing market...artificially.

But don't throw the baby out with the bathwater! There's a right way and a wrong way to use an Option ARM.

You need to understand that you can't build a castle by eating away at it simultaneously. However, Option ARMs are very appropriate when your goal is to accumulate the principal outside of just handing it over to the mortgage company. In other words, if you use the savings of an Option ARM to still make your principal payments, but make them into something (i.e. a cash or other investment account) where you can control getting it back for emergency or investment opportunities, then you haven't really failed to make your principal payments at all, have you?

In fact, if you take a look at Doug Andrew's new book, The Last Chance Millionaire, and you read Chapter 7, Learn How to Become Your Own Banker, you'll see that this is actually a faster way of paying off a mortgage!

Believe it or not, we actually recommend to many of our clients to get an Option ARM -- IF they will take the otherwise payable principal, and save or invest it. Now you're off to the races!

That principal could buy other real estate, or be invested into insured investments which have a history of clearly outperforming the cost of the mortgage. That's how you use an Option ARM.