 |
 |
|
|
|
|
|
|
|
Option Arm Loans |
|
An option arm loan is a mortgage program providing
homeowners with a number
of payment options each month ranging
from a minimum payment to the full principal and interest
payment. These loans also contain an interest only payment
feature and usually have interest rates tied to the COFI, MTA or LIBOR
index. First-time homebuyers should understand
the risks and
the benefits associated with
these programs before jumping for the low payments.
Option ARM loan programs are not for everyone however they do serve a
purpose for many homeowners. If you plan to own your property
for a short period of time and prefer lower monthly payments than
this can be a very attractive loan option. However, if you
only consistently pay the minimum you should consider more
conservative loan programs. |
| |
|
|
| |
|
Payment Options |
|
Option Arm loans come with four
(4) payment options.
Depending on interest rates you will receive the option to
make
either one of these payments every month. These loans also usually include the following
measures to reduce your risk of rising interest rates. |
|
|
 |
A fixed interest rate for an initial 1-month period |
|
|
A minimum payment
amount that adjusts on an annual basis |
|
|
A 7.5% payment change cap* |
|
|
A lifetime interest rate cap |
|
|
|
|
* The
payment change cap limits how much the minimum monthly payment
can increase or decrease from the previous minimum payment.
Many lenders make exceptions so this cap is not in effect during
the fifth year of your loan and every five years thereafter. |
|
|
|
|
|
|
|
Option 1 - Minimum Payment |
|
This option is also known as the "Minimum Payment Due" and provides
the greatest monthly cash flow savings. Your payment will change annually and is calculated using the initial
interest rate for the first 12 months. The minimum monthly
payment is usually re-calculated annually and based on the
outstanding principal balance, remaining term and then current
interest rates. This payment is usually capped at a 7.5%
annual increase or decrease. |
|
|
|
|
|
|
|
Option 2 - Interest Only Payment |
|
When the minimum monthly payment is not sufficient to cover the
monthly interest due a homeowner can avoid deferred interest by
paying the minimum monthly payment plus any
additional interest accrued during the month. Please note
that this option is not offered if the interest only payment is
less than the minimum payment due. |
|
|
|
|
|
|
|
Option 3 - 15 Year Fixed Rate Payment |
|
The largest monthly payment option which allows a consumer to
apply the most towards principal and term reduction. This
payment is calculated to amortize your loan based on a 15-year
term from the first payment due date. Please note this
option is offered only on the 30 or 40-year term program and
will cease to be a option once the loan reaches its 16th year. |
|
|
|
|
|
|
|
Option 4 - 30 Year Fixed Rate Payment |
|
This is the fully amortized payment based on a 30-year loan and
is calculated each month based on the prior month's interest
rate, loan balance and remaining term. The biggest
advantage to this payment option is that the payment pays all of
the interest due and reduces your principal. Please note
that this option is not offered if the full principal and
interest payment is less than the minimum payment due.) |
|
|
|
|
|
|
