Although the headline seems ridiculous, it has never been more on point than in the current mortgage market. I have said to anyone who will listen that the 1% loan cannot have any traction left to it, but my amazement keeps growing as fast as the demand for this loan.

There is even a nationally advertised attorney who is threatening a class action suit against lenders who "push" this loan, and the lenders still keep coming up with new angles. At some point, you would thinkg that either I would learn something or the borrowers would learn something, and yet it seems neither of us can get a grip on this phenomena.

First and foremost, this is not a new loan. It has been around for at least several decades.

It has gained popularity as many mortgage advertisers tell you such things as "it's the biggest no brainer in the world" or "just because the mortgage payment doesn't go toward your principal, it doesn't mean your house won't appreciate". Huh! Can anyone say non- sequitor? Wouldn't you think someone might regulate the advertising we are forced to endure. Maybe we could have a group of M.D.'s report that children that are not yet in high school could revert toward childhood if subjected to this drivel.

What am I talking about you ask? I'm speaking of the option arm. Most people would refer to it as the 1% interest rate loan, but that wouldn't be correct. It is the 1% payment rate loan, and that is where the problem arises. If you watch old movies, or the Sopranos, you realize that when you borrowed money in the past, you had to make your payments, generally interest, on time or face some physical hardships. Well, that concept is the antithesis of that loan. Not only do you not have to make any principal payments, you don't even have to make most of the interest payments either. HOW SWEET IS THAT! If 1% is too high, we now have a payment of $20 per $100,000 or $200 per $1million. If the 1% loan is a "no brainer", I can't even begin to guess what this one will be called.

Let's take a good look at this loan. From my introduction, you probably think that the 1% payment is the worse thing about the loan, but you would be wrong. It is called an option arm because you have three other options that you can pay: interest only, 15 year fixed payment or a 30 year fixed payment. The problem is if you wanted to take an interest only loan or a 15 or 30 year loan, you could most likely get these loans at 1/2% or more lower than what you are being offered. So let's recap: you get this loan with this wonderfully low payment, and if you are worried that it could lead to some danger, you have three options that are much higher than a straight retail loan. And you think that my industry, the mortgage industry, can't do clever marketing? They make some of the legends of the past, P.T. Barnum, Mad Man Muntz (I lose money on every deal but make it up in volume), the inventor of the pet rock and anyone of your local hucksters that might have been around when you were growing up look like rank amateurs.

Now lets examine the 1% or the $20 per $100,000 feature of this loan. On a $200,000 loan at 1%, your payment is $643 per month amortized over 30 years. Otherwise, you could take the other new one and your payment would be $40 per month. The interest on the loan at 7.5% would be $1250 a month. In the 1% example, you would be "going negative" by $607 a month and in the $40 example your negative would be $1210 a month. Your annual negative would be between $7700+ and $14,500. These amounts are added to your balance and will also carry interest, so you get to payback the principal and the interest and the interest on the interest.

Writers note: On the $20 per $100,000 loan, you must have 35% equity in your house or you can't get the loan. In the above example, it would mean having a value of $307,000.

You would need that much because this loan would probably be suspended when your balance would reach 120% of the original loan ($240,000) which would be in about 3 years.

At that point, you would have to make at least full interest payments which would be about $1500 a month. This is a variable loan so all the figures are based on the current interest rate. If the rates drop or increase, there could be significantly different results.

Why does this loan exist? First and foremost, it exists because it can be sold with ease regardless of what anyone might say. Is there any good use for this loan? Absolutely! But its use is good for a very few people. In the four examples I am going to give you, I have only ever used it in the first example.

1. Huge equity and little income. Continued...