Some seniors who had option ARMs have been helped by receiving reverse mortgages from their lender. It issued the loans for about twenty people who were seriously at risk of losing their homes through foreclosure, according to the Wall Street Journal.

What Is an Option ARM?

Pay-option adjustable rate mortgages, also known as option ARMS, have come under fire because some borrowers say they were not given enough information about how the loans were structured. Some borrowers have even filed lawsuits against mortgage lenders over the loans, claimin they didn’t understand what they were getting into. Option ARMs allow borrowers to choose from several payments, from a minimum one that doesn’t even cover the interest that accrues each month to a payment that would retire the loan in fifteen years. Many chose to pay the smallest amount possible each month on their mortgages, and they actually saw their balances increase because those payments didn’t cover the monthly interest.

How Can a Reverse Mortgage Help?

So how does getting a reverse mortgage help the homeowners who previously had option ARMs? The bank agreed to modify the terms of some option ARM and sub-prime mortgages.

One homeowner featured in the Wall Street Journal article owed a lot more on an option ARM than his house was worth. The bank agreed to write down a portion of the amount owed and then issued a reverse mortgage. However, unlike normal reverse mortgages where the proceeds go to the homeowners, the bank paid the money to itself.

Reverse Mortgage Instead of Foreclosure

The homeowner is now able to live in the home without making monthly payments on that mortgage. If that person dies, Bank of America owns the home but his heirs can choose to buy it back for the amount of the loan with interest. A spokesman said the bank loses money by doing the write-downs, but not as much as if the home went into foreclosure.

This entry was posted on Wednesday, October 21st, 2009 at 6:04 pm and is filed under Reverse Mortgage . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.