Who can benefit?

Option and fixed-option ARMs are not one-size-fits-all mortgage products. They tend to work best for nontraditional, sophisticated borrowers who want to manage their monthly cash flow. For those who fit the profile, it can be the key to owning their dream home while, at the same time, investing freed-up cash for financial-planning purposes. Those who have an irregular income because of commission-based salary, self-employment or seasonal employment also may benefit from the flexible monthly payments.

An option ARM or fixed-option ARM also may be a wise choice for people who are planning to live in their house for only a couple of years. For instance, a newly married couple who buy a starter home or a family who moves around the country because of frequent job transfers know they will not stay in the home until the mortgage is paid off. This changes their mortgage goals from establishing equity and toward affordable payments and low-interest rates.

A fixed-option ARM could be an especially good fit for these homeowners because it allows them to lock in a low interest rate for 10 years.

Not for everyone

Although option ARMs and fixed-option ARMs can offer some homeowners an attractive alternative to traditional fixed-rate mortgages, they are not right for everyone. In the past few years, they have gained attention after unscrupulous lenders used these products to qualify borrowers for mortgages for which they would not otherwise have qualified.

Homeowners should not take an option ARM or fixed-option ARM simply because it is the only way to qualify for financing to purchase a home. Doing so can be a prescription for disaster. And electing to take an option ARM or fixed-option ARM because they are convinced that their property value will only increase and never fall is simply foolish.

Allowing homeowners to use the flexible monthly payments to achieve their financial goals is one of the purposes of these products. But borrowers who only make the minimum monthly payment without making any additional payments against the loan balance can see negative long-term effects.

Joseph Badal is senior executive vice president and chief lending officer of Thornburg Mortgage Inc., a single-family residential mortgage lender with $52.9 billion in assets focused principally on the jumbo sector of the adjustable-rate-mortgage market. Visit the company's Web site at www.thornburgmortgage.com or contact Badal via e-mail at lendingpartners@thornburgmortgage.com.

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