What is the PayOption ARM?

Imagine an adjustable rate mortgage that allows you to pick one of four payment options on your monthly mortgage bill. It is an ARM on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a "minimum" payment that may be less than the interest-only payment. The minimum payment option results in a growing loan balance, termed "negative amortization".

How Will I Know an Option ARM When I See One?

Ask the loan officer if the mortgage has more than oe payment option. Does the rate adjusts monthly, and if negative amortization is allowed. If the answer to both questions is "yes", you almost certainly have an Option ARM. Their names are all over the map and include "1 Month Option Arm", "12 MTA Pay Option ARM," "Pick a Payment Loan", "1-Month MTA", "Cash Flow Option Loan", and "Pay Option ARM".

What Are the Advantages of an Option ARM?

Their main selling point is the low minimum payment in year 1. It is calculated at the interest rate in month 1, which can be as low as 1%, and it rises by only 7.5 % a year for some years. The low initial payment allows borrowers to buy a more expensive home than they would be able to afford. Other reasons are to use the monthly payment savings for other purposes, like: paying down the principle, and amortizing credit card debt. Be aware that they seldom explain the risks.

What's Are the Risks of an Option ARM?

For those electing the minimum payment option, the major risk is "payment shock" ? a sudden and sharp increase in the payment for which they are not prepared. The rule that the minimum payment can rise by no more than 7.5% a year has two exceptions. The first is that every 5 or 10 years the payment must be "recast" to become fully-amortizing. It is raised to the amount that will pay off the loan within the remaining term at the then current interest rate ? regardless of how large an increase in payment is required. The second exception is that the loan balance cannot exceed a negative amortization maximum, which can range from 110% to 125% of the original loan balance. If the balance hits the negative amortization maximum, which can happen before 5 years have elapsed if interest rates have gone up, the payment is immediately raised to the fully amortizing level. Either the recast provision or the negative amortization cap can result in serious payment shock. That is why I tell my clients that unless you have a financial plan for paying the minimum payment, always pay the Interest Only Option or higher.

How Do I Protect Myself Against The Risks?

First of all, if you can't maintain financial discipline do not engage in this type of loan. You will be tempted to pay the minimum payment from day one. When it recasts, you will be stuck between a rock and a hard place. If you have sound financial principles, and can adhere to them, go for it.

Make sure your loan officer discloses the margin. The lower the margin, the lower your cost and your vulnerability to payment shock. You can also minimize the risk by taking the highest initial payment you can afford. The higher your initial payment, the smaller the potential payment shock down the road.

Terell Jones, Sr. Loan Officer, Group Manager

Terell Jones has been a successful mortgage professional for several years. He leads a team of loan officers with 1st American Mortgage, Inc. in McLean, Virginia.

http://www.Mortgage1234.com

---

Stock Market, Bonds, Deposit Account, Cash, Equities, Unit Trusts - Few, Just Few of the Ways of Sav

Man has been known for continually simplifying things in his... Read More

Securing a US Commercial Mortgage

What's the most efficient way to secure a US Commercial... Read More

Be Prepared when Seeking a Mortgage

When you're looking for a mortgage, whether it's a first... Read More

Refinancing Your Home - How and Why?

Chances are you may need a little extra money to... Read More

First-time House Buyers: to Buy or Not to Buy; that is the Question

Buying your first house is always a difficult time. There... Read More

What On Earth are Home Equity Loans?

Home equity loans are one of the most common types... Read More

Bad Credit? Qualify Yourself For A Zero Down Mortgage Loan

I decided to write this article today after closing a... Read More

Home Loans: Where Do I Begin?

So you've finally decided you've had enough of paying rent... Read More

Bad Credit Home Loan - Apply Online and Keep Your Credit Score as High as Possible

If you have a poor or bad credit history with... Read More

Understand a Real Estate Appraisal

Happy New Year. Make a difference this year. "Pay it... Read More

Guide to Home Equity Loans

Here is a useful guide to home equity loans. A... Read More

Reverse Mortgages ? A Tax Free Income For Senior Citizens

I fully realize if it sounds too good to be... Read More

Home Mortgage Quotes Online - How Do They Compare To a Quote From a Broker in The Real World?

Online home mortgage quotes are very similar to the quotes... Read More

How To Tap In To Your Home Equity

With today's relatively low interest rates and climbing property values,... Read More

Refinance Mortgage Loan ? Tips on Refinancing Your Home Mortgage

Refinancing your home mortgage can come with some great perks.... Read More

Home Equity Line of Credit - Finding The Best Home Equity Lender

Borrowing against the value of your home using a revolving... Read More

Home Equity Loans

A home equity loan allows you to cash-in on the... Read More

Poor Credit Home Mortgage Loans - The Role of the FICO Score

If you have bad credit history and are looking to... Read More

Securing the Best International Mortgage for Your Home in Spain

Are you one of a growing number of people planning... Read More

Home Loans -- Federal Regulators Warn Lenders to Be More Careful

Federal banking regulators have recently expressed some concern over the... Read More

Are You Ready for a 40-year Mortgage?

Real estate prices have been increasing steadily over the last... Read More

The Best Tactics for Getting a Quick Homeowner Loan

Trying to find a quick homeowner loan can seem difficult... Read More

What to Really Expect for Closing Costs

Closing on a property is a very challenging time for... Read More

Shopping for a Mortgage, Avoid Three Common Mistakes

Buying a home or refinancing one is perhaps the largest... Read More

No Money Down Home Loan

Are you in the market to purchase a home but... Read More

Refinancing and Car Finance - Is it worth it?

Refinancing and Car Finance - Is it Worth It?No doubt... Read More

Poor Credit Home Equity Loan Tips

A home equity loan can help repair your poor credit... Read More

A Home Equity Loan ? Is It For You?

Home equity loans are often touted as being the solution... Read More

Reverse Mortgage Providing Peace of Mind Without Sacrificing Safety or Security

For many seniors one of their greatest sources of security... Read More

Guide to Mortgages

A mortgage is a loan that is guaranteed by a... Read More

Secured Lending - a Guide to Releasing the Value in Your Home

The recent boom in house price values have made some... Read More

How to Find the Best Home Improvement Loan

If you're looking for the best home improvement loan for... Read More

13 Extra Costs to be Aware of Before Buying a Home

Whether you're looking to buy your first home, or trading... Read More