It's low introductory start rate
allows you to make very low initial mortgage payments and low qualifying
rates enable you to qualify for more home.
The minimum payment
option can help keep your monthly payments affordable. If the minimum
monthly payment is not sufficient to pay the monthly interest due, you can
always avoid deferred interest by choosing the interest-only payment option.
With the Option ARM, you generally have at
least two fully amortized payment choices, leading to a quicker loan payoff.
If you prefer to pay off your loan on schedule, you can make the fully amortized payment based on a
30-year loan, or you can
choose the 15-year payment option
for the fastest equity build-up.
In most cases, you can also make additional principal
payments which reduce the amount you need to pay in later months.
Option ARM loan programs are right for you
if you'd like to own your property only for a short time, and prefer
affordability and flexibility in your monthly payment. However, if you select the minimum payment option
in the early years, you should be prepared for possible sudden increases in
your monthly payments thereafter.
Option ARM loans have four major types of payment options:
Minimum
Payment
With the
minimum payment option,
your monthly payment is set for 12 months at your
initial interest rate.
After that, the payment changes annually, and a
payment cap limits how much
it can increase or decrease each year.
If you make
the
minimum payment after the
end of your
initial interest rate period,
which holds only for the first month, it may not be enough to pay all of
the interest charged on your loan for the previous month and the unpaid
interest will be added to the principal balance you owe (will be
deferred).
Interest-Only Payment
With the
interest-only payment option, you can avoid deferred interest, when the
minimum payment is not enough to pay the monthly interest due. The
interest-only payment option, however, is not available if the
interest-only payment would be less than the minimum payment. Please note,
that this payment option does not result in your principal reduction.
The
interest-only payment may change every month based on changes in the
ARM index used to determine
your
fully indexed rate.
Fully
Amortizing 30-Year Payment
With
fully amortizing payments, you pay both principal and interest and keep
your loan on schedule. Your payment is calculated each month based on the
prior month's
fully indexed rate, loan
balance and remaining loan term.
Fully
Amortizing 15-Year Payment
If you
prefer to put your loan on an accelerated schedule and can afford higher
monthly payments, the 15-year payment option allows you to repay your loan
twice as faster and save more than half the total interest costs of a
30-year loan.
Please note,
that this payment option is offered only on the 30-year (or 40-year)
term. It will cease to be
an option when the loan has been paid to its 16th year.
These options should be clearly marked on your loan
statement, so it is very easy to figure out how much you should pay each
month. Just enter the correct amount in the payment coupon section of your
statement.
Option ARM loan programs are becoming more
and more popular today, and there are many variations of this innovative
home financing product on the market: Pay Option ARM, Pick-A-Payment Loan, 1
Month Option ARM, CashFlow Option Loan, LIBOR (or 12-MAT) Pay Option Loan,
etc. If you are thinking about applying for an option ARM,
it is important to shop carefully and investigate several loan products, to
find the one best for you.
The sum of
the
margin and the
most recent
index figure
available prior to a scheduled interest rate change date. Subject to the
interest rate
caps.
Interest
Rate Adjustment Period
The time
between interest rate adjustment dates.
With option
ARMs, the adjustment period is usually set to 1 month: the
fully indexed rate
may not change more than once every month based on the movement of the
index.
A lifetime
cap limits the interest rate increase over the life of the loan. It protects
you financially and usually is expressed as maximum rate. Lifetime caps may
vary from 9%-10% up to 19%.
Initially
(for the first 12 months), the minimum payment is
calculated
using the
start rate, the
amount you borrow and the
loan term.
Thereafter, it is recalculated annually.
The minimum
payment adjustment period is usually set to 12 months, unless
negative amortization
limit is reached.
Minimum
Payment Change Cap
A limit on how much the
minimum monthly payment can change at each adjustment. With most option ARMs,
your payment cap will be 7.5% of minimum payment amount in first five years.
It means that on any Payment Change Date, the minimum payment cannot
increase or decrease by more than 7.50% (unless the loan is recast
or the
negative amortization
limit is reached).
Negative
Amortization Cap
(Also known as: Balance Cap, Negative Amortization Limit, Negative
Amortization Ceiling)
It limits
the loss of equity in your home when low monthly payments do not cover fully
the interest rate charges agreed upon in the mortgage contract and is
usually set to 110% - 125% of your original principal balance. When the
negative amortization limit is reached, the
minimum payment
increases immediately: the payment required to fully amortize the loan over
the remaining term becomes the new minimum payment, and the
payment cap
does not apply.
Payment
Recast Period
Recasting
(or re-calculating your loan) is another way of limiting negative
amortization and keeping your loan on the original schedule. Option ARM
loans are recast every five years (or sooner, if the
negative amortization
limit is reached). This re-calculation is based on the
outstanding principal balance, the remaining term and the
fully indexed rate.
When the loan is recast, the payment required to fully amortize the loan
over the remaining term becomes the new minimum payment, and the
payment cap
does not apply (the payment cup, however, will go back into effect
immediately after the recast, and will hold until the next time your loan is
recast).
Index
Options
Your
interest rate is usually based on one of the following indexes:
Click on
index title for explanations. Click here for
current and
historical
values.
Historical
performance of the four most popular option ARM indexes over the last 14
years.
Margin
The number
of percentage points (for example, 2.75) the lender adds to the index rate
to calculate the ARM
interest rate
at each
adjustment. The
margin is set in the mortgage contract, remains fixed for the
term of the loan
and is not impacted by the financial markets and movement of interest rates.
Full doc,
Limited doc, Low doc, Stated Income, No Income\No Asset (NINA), Stated
Income\Stated Assets (SISA). Read more about
Loan Documentation
Requirements.
Click here for
a list of documents most lenders will require in order to process your
mortgage application.
Loan Program
Variations / Options / Special Features
Initial
Fixed Rate Period
An option
ARM loan may have an initial fixed rate / fixed minimum payment period of 3
or 5 years between the time the loan is originated and the first interest
rate change date. After the initial period the loan converts to monthly
adjustable Option ARM (the interest rate adjusts every month and you will
have payment options).
40-Year Term
Some option
ARM loans, for a fee (or for an increase in your rate), contain a provision
permitting you to increase the term of the loan from 30 to 40 years.
Bi-Weekly
Payments
Some lenders
offer optional bi-weekly payment plans with option ARMs. With
bi-weekly mortgage plan
you pay half of the monthly mortgage payment every 2 weeks. It allows you to
repay a loan much faster. For example, a 30 year loan can be paid off within
18 to 19 years.
Conversion
Option
The interest
rate or points may be somewhat higher for a convertible option ARM, and it
also may require a small fee at the time of conversion.
