What Is An Option Adjustable Rate Mortgage?3 min read

Getting a mortgage for your home means that there are many different possible options. An option ARM, or adjustable rate mortgage is one possibility available for financing your new home. This mortgage gives you flexibility in the way you meet your monthly payments. Here are some details that will enable you to know if this mortgage is the one you need to purchase your home.

The option ARM’s outstanding feature is that it provides the borrower with four different ways to make the monthly payments. This gives you the ability to control the way you make the payments. When things get a little tight, you can change the payment you make during that time. The four payment options are as follows:

Minimum Payment Option

Once you have passed the low introductory payments with its special offer, you can expect that you will start paying the interest rate you received for the first year. The first year of an option ARM allows you to make a minimum payment each month. This can have an interest rate between 1 to 4%. Some option ARM’s may even permit you to skip a payment altogether – remember, though, it gets added in somewhere.

It is important to note that if the amount of your payment does not cover the interest for those months, it does become added to the principal amount you owe.

The following year, however, the interest rate will climb to more normal market conditions, with a max cap of a 7.5% increase.

Interest Only Option

Another way that you can pay on an option ARM is to choose the interest only option. This allows you to pay the interest only each month. Notice, however, that interest only payments do not reduce your principal. You can expect that the payment size will change monthly based on current market interest rates.

30 Year Fully Amortized Option

This option allows you to make standard payments which will fully amortize the loan at the end of 30 years. The payment is calculated each month according to the interest rate at the time.

15 Year Fully Amortized Option

This mortgage is based on a 30 year calculation. You are making payments, though, so that it can become fully amortized in just 15 years. You do have the larger payments to make, but will save a lot of money by reducing the payment period.

It is very important, especially with the first option that you watch out for negative amortization. While some lenders actually use this term to name their product – it usually is not a good thing. You can find that your payments get raised very high (unusually so) in order to bring your payments into a fully amortizing status. In some cases, the caps may not apply because there is a possible resetting of loan terms when negative amortization occurs over a period of time.

Just like with any mortgage purchase you make, you should shop around in order to find the best deals. This will mean getting several quotes and comparing the various fees, interest rates, and terms. You will also want to know exactly what the margins are, too.

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