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Flexibility And Choice: The Option
ARM
What is an
Option ARM?
Also known as Pay Option ARMs or Pick-A-Payment Mortgages, the Option
ARM allows you greater flexibility in making your monthly mortgage
payments and helps you better manage your cash flow from month to month.
Put simply, an Option ARM is a flexible adjustable rate mortgage product
that lets you choose the amount you pay each month. Although Option ARMs
have been around for several years, their popularity has grown
dramatically in the last couple of years.
How is the
Option ARM flexible?
Option ARMs give you a choice of four different payments:
1)
Minimum Payment – With this option, the borrower can make a smaller
payment (usually at a 1% rate of interest) to minimize monthly costs.
The initial minimum payment amount is set for the first year and then
the payment can change on an annual basis, usually with a cap of +/-7%
to 7.5%.
2)
Interest-Only Payment – This option allows you to make a full interest
payment. Although this type of payment will not reduce the principal on
your loan, it does allow you more flexibility with your cash flow than
full principal and interest payment options.
3)
30- Or 40-Year Payment – With this option, you can make the standard
full principal and full interest payment. These payments are fully
amortized and will keep you on schedule to pay off your loan in 30 or 40
years, depending on the term of your loan.
4)
15-Year Payment – With this accelerated payment, you can build equity in
your home and save money on interest. Although your payment will be
higher, you can pay off your mortgage twice as quickly with this
schedule.
Who are
Option ARMs good for?
Option ARMs are beneficial to a wide variety of people including:
-
People who
do not want to spend a lot on mortgage payments.
-
Borrowers
who want to pay off other debts.
-
People that
have commission-dependant jobs.
-
Those whose
income fluctuates.
-
Borrowers
who want to have more savings in case of emergencies.
-
Investors
who need to carry more than one mortgage.
-
Those who
want the option to pay off their mortgage quicker in the future.
What are
the benefits of an Option ARM?
The Option ARM has many benefits, namely allowing you to tailor you loan
payments to achieve your financial goals. Also, many Option ARMs have
other benefits including low introductory start rates and low qualifying
rates (which can help to qualify for a higher loan). Finally, some
Option ARMs do not require high down payments, thus giving you even
more flexibility with your finances. As always, consult with your
mortgage professional to see if an Option ARM is right for you. ∆ |
