Question:

What are option adjustable rate mortgages (Option ARMs)?

Answer:

Option adjustable rate mortgages are the fanciest of all ARMs. They offer the greatest possible flexibility and variety of payment options to borrowers and this is the reason they are so popular. Even though option adjustable rate mortgages (ARMs) can bring great benefits to some borrowers, they are also dangerous to use by uneducated borrowers. Before signing an Option ARM, make sure you have a very good understanding what ARMs are, and why you are taking one.

Option ARM Payment Plans

Option adjustable rate mortgage basic payment will require interest and principal. The loan is scheduled to amortize over a set number of payment periods.

Interest-only is another payment scheme possible with an option ARM. The monthly payment includes only interest. The loan principal remains unchanged, unless the borrower chooses to make payments towards the principal.

Minimum payment is the riskiest Option ARM payment plan as it results in negative amortization. The difference between the minimum payment and the interest-only payment is added to the principal. This is the payment plan most popular with investors who are trying to maximize cash flow.

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