If someone were to ask you to name the most toxic or dangerous mortgage 
that exists, you would most likely name the pay-option ARM. Why? Because it allows the borrower to go deeper into debt by paying less than the minimum interest owed each month, adding that difference back into the loan principal. You may even talk about the potentially high prepayment penalties associated with some of them prevent borrowers from being able to get out easily once they are in it. Chances are that you would support the current move to ban these "worst of the worst" type loans.
Guess what though? It turns out that the worst is actually the best.
Option ARMs and other so-called "toxic" mortgages have been portrayed incorrectly by the media. Yes, there are numbers of homeowners who were duped into these products by greedy mortgage originators. But, reality, as is often the case, is quite different.
A study from professors at Columbia and NYU actually found that the "optimal" mortgage in a perfect world is the Option ARM. Sound crazy? It's not. I have explained how these products can be used to create tremendous wealth, but they must be used properly. I have even talked about how taking on more debt can actually help you become debt free faster.
The study breaks it down through mathematic formulas (the report is 65 pages long) and surmises that the "optimal" mortgage in a perfect world would be an adjustable rate mortgage with an option for negative amortization and a ban (or at least severe restrictions) on prepayment. The report goes on to say that a perfect world is namely one in which borrowers are fully rational and always do what's in their own best interests.
Therein lies the problem as most Americans do not meet the criteria for living in a "perfect world". Unfortunately, many Option ARM holders foolishly believed they would never have to pay more than the minimum monthly. Eventually, after paying the minimum long enough, their loan balance hits a ceiling at which the loan recasts and becomes a new loan in essence with larger payments. Now these homeowners face default and foreclosure.
So, if the optimal loan is truly better for homeowners who behave rationally, maybe it makes sense to get people to behave rationally through extensive consumer education. If you attend one of my seminars or read my blogs long enough, chances are you already understand that the "old way" of thinking can cost you incredible amounts of money over time, possibly even preventing (at least limiting) your ability to retire.
If you are a numbers guy like me (and there are a lot in this report), then read the report yourself.
Education is the key to financial success as is looking at all financial strategies, including the proper integration of your mortgage into your overall financial plan. Focusing on paying off your mortgage as fast as possible may actually be the worst thing you can do to your financial plan, as counterintuitive as that may seem. Please keep in mind that there is no "one size fits all" strategy.
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