Question:

What is important to know about the Option ARM mortgage loan?

Answer:

The option ARM mortgage loan is a great mortgage instrument - it allows for extremely low payments for up to several years; frees cash and is of great benefit of those living in high cost areas. In fact, it is a powerful tool in the hands of a seasoned investor or homebuyer. However, the inherent complexity of Option ARM mortgages makes them dangerous to less experienced borrowers.

Top Important Facts about Option ARM Mortgage Loans

  1. Flexibility of payment is a great feature of Option ARMs. One can choose to pay:
    • regular interest and principal,
    • or make interest-only payments,
    • or even pay the bare minimum.

    Make sure that you are clear about how your mortgage loan is amortized with each option. With a principal plus interest payment, your loan is being fully amortized; if you make interest-only payments at the end of the specified period, no amortization will have occurred. Choosing to pay the minimum option, negative amortization will occur with your Option ARM mortgage loan.

  2. Also, the Option ARMs may have a very low teaser rate for a very short period of time - say, 3%. Beware, as this option may be very short-lived - for a month or so.
  3. When the fixed term with great low rates expires, if you chose to make only the minimum payment, your loan balance will begin to grow.
  4. If your Option ARM mortgage loan balance reaches 110% or 125% of the initial amount (as determined by the lender), or after a specified period set in the agreement expires, the Option ARM balance will be recalculated for the loan to amortize fully. At that point the only available payment option will be principal and interest, leading to full amortization of the loan. Since many people set for an Option ARM with the only purpose of making a minimum payment, for the major part borrowers are in for a payment shock.

While the Option ARM mortgage loan can be a great flexible mortgage for commissioned people, other borrowers not educated about the peculiarities of the loan would do better with a more easy-to-understand fixed rate mortgage. Also, choosing an FRM instead of an Option ARM does reduce the risk of becoming a predatory lending victim; even more so for subprime loans.

Recommended helpful present and future homeowners links:
Why: Refinance to a fixed rate loan while mortgage rates are still low.
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Common misspellings: mortage and morgage