The media is full of stories about how Option ARMs and exotic mortgages are the scorage of the real estate industry. Nothing could be further from the facts. Exotic loans have extended the real estate boom, and possibly lower default rates for marginal borrowers.

Option ARMs are tools when used prudently allow a borrower to control their cash out-flow and make payments fit their income. In the past lenders required mortgages payment on their "monthly" schedule. Option ARMs give the consumer the ability to pay principal and interest when its best for the consumer.

I believe the exotic loans are good tools for borrowers who know how to use them. Interest only payments allow a borrower to pay a smaller payment when cash flow is low, and pay down principal in better times. These loans actually reduce the risk of loan default, because default only happens when a borrower can't make their monthly payment.

Therefore any loan that allow this kind of payment flexibility should be seen as a positive for loan quality and stability, not riskier?

The consumer clearly understands the value to interest only and exotic payment mortgages, this is why they have become the most popular loan options. But few consumers are being interviewed to defend why they choose these loans.

Option ARM mortgages enable savvy consumers to better manage their own personal cash flow.