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.

bullet A fixed interest rate for an initial 1-month period
bullet A minimum payment amount that adjusts on an annual basis
bullet A 7.5% payment change cap*
bullet 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.)