Question:

What are the specifics of the Option ARM wholesale lenders have recently begun to promote?

Answer:

Option ARMs are a recent addition to the current suite of loan products offered by wholesale lenders. An ARM offers lower initial interest rate for the fixed period and then the rate adjusts up or down according to a market index. Option ARM payment options will include what is common for an ARM, but will also give the borrower additional choice of monthly premiums: such as interest-only and minimum payment. The minimum payment option is usually lower than the interest-only and results in negative amortization of the loan. That is, the borrower may end up owing between 110-125 percent of principal.

However, the Option ARM can be offered to people with lower credit score, and can be very cost-effective for buyers living in high-cost areas such as California and New York.

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