AgentMortgage

Borrower learns downside to option ARMs

Did broker make more by steering customer?

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"Does a mortgage broker make more money with an option ARM than with a fixed-rate mortgage? I went to the broker looking for a 30-year fixed deal and allowed him to talk me into an option ARM -- with a three-year prepayment penalty that I didn't find out about until the closing. I have perfect credit and didn't need the lower payment; I have been making the fully amortizing payment every month. Did he steer me into that loan because he made more money on it?" In all likelihood, yes. The price of a 30-year fixed-rate mortgage is difficult to conceal; the borrower knows what the rate is and what it means. On an option ARM, the principal price is the margin, which most borrowers don't understand and which isn't a required disclosure. The margin is the number that is added to the rate index every month, starting in month 2, to determine the new rate. Paradoxically, because margins don't fluctuate with the market, option ARMs are the easiest type of mortgage to shop -- if you know the secr...