How to compare Option ARM vs fixed rate mortgage (FRM)?


Borrowers may wonder when to use an Option ARM vs fixed rate mortgage (FRM).

A fixed rate mortgage offers stability and predictability; it also allows for building equity. However, many borrowers refinance every 5 years or so, and paying principal and interest on a house one is not going to keep ties cash into the house with no need - in that case an Option ARM could be a great choice. Fixed rate mortgages are recommended for prime borrowers with excellent credit who can qualify for an FRM with good rates.

On the other hand, Option ARM loans (also called Pick a Pay) are extremely flexible and powerful loans - sometimes too powerful for the average borrower to handle.

Option ARM Loan Payment Plans

  • Minimum payment option allows that the payment is below the interest-only payment. This option will lead to negative amortization of your loan principal
  • Interest-Only option allows the borrower to make interest-only payments. The loan balance will remain the same if no extra payments are made to the principal

Minimum and interest-only options are available for limited time - from a month to up to 10 years.

  • Fully amortizing payment of interest and principal is required after the fixed period of minimum and interest-only payments is over. The loan payments will be recalculated to amortize over, say, 30 years.

An Option ARM allows for very low payments for a limited time and since it is possible to contribute extra payments towards the principal, it is a very plausible option for self-employed and commissioned borrowers living  in high cost metropolitan areas, such as California and New York. Not to mention that a fixed rate mortgage would be more difficult to qualify for than an Option ARM.

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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