Option Arm Loans - 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 upon receipt of your mortgage statement.  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 Due (provides greatest monthly cash flow savings)

Payment changes 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:  30 Year Fully Indexed Principal and Interest 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.)

Option 4:  15-Year Full Principal and Interest 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.