Option ARM Time Bomb Blows Early, Limiting Housing Hit

This was the year thousands of U.S. homeowners with option adjustable-rate mortgages were supposed to default as their payments spiked. Low interest rates and a surge of early delinquencies mean the numbers probably won’t be as bad as forecast, softening the blow to a housing market where prices have resumed falling.

Consider Stan Jones, who took out option ARMs in 2005 and 2006 to buy homes for his daughter and son during their college years. He estimates that the loans, which have a floating rate tied to a short-term bond index, saved him thousands of dollars as the Federal Reserve drove borrowing costs to record lows.