Option Arm Mortgage
If you have never heard of an Option Arm Mortgage, you are not alone. The somewhat quirky mortgage is a rather recent and somewhat off-the-beaten-path loan product, and is essentially packaged as a convenient tool for managing your monthly mortgage payments. Mortgage companies introduced the Option Arm as a way to provide borrowers with flexibility and control over their loan payments and to help them creatively organize their household budgets.
The nuts and bolts of how this type of mortgage works are basically the same, and boil down to this:
Each month, before you mail in your monthly payment, you have the option to pick the installment plan that works best for you.
Your choices will usually number 3-4 different ways you can pay. For example, you may be given these choices:
- Pay the minimum payment only. This usually means you only pay a portion of the interest, and no principal.
- Pay only your monthly interest, based on a 30-year amortization schedule.
- Pay your principal and interest, based on a 15-year amortization schedule.
- Pay your principal and interest based on the same schedule of monthly payments that you would normally expect to have with a 30-year mortgage.
Many people who are familiar with the Option ARM mortgage like to compare it to the way a credit card payment plan is structured. You may have a credit card company that will allow you to pay the minimum payment only, or pay off your balance in full. Or you might be able to choose any amount you want to pay, between the minimum and the maximum. An Option ARM offers you similar choices, but for a mortgage.
The catch is that when you only make the minimum payment, your principal balance will rise. Let's say you make a minimum payment of $800, but the interest that is calculated on your loan for that particular month equals $1,000. Your mortgage company will tack the difference ($200) onto the principal, so if you continue to pay the bare minimum, your principal will get bigger, not smaller.
The Option ARM is great for certain people in specific situations, but may not be appropriate for others. This kind of loan is especially handy in situations where you are low on funds for a month or two. Maybe you are paying for a wedding, back to school clothes, or Christmas gifts. You can pay less on your Option ARM for a month or more, and use the extra money for other expenses. After your spending gets back to normal, you can select a different option, and contribute more money toward paying off your interest and principal. Each time the bill comes, you choose which method of payment suits you best, so the Option ARM puts you in the driver's seat by letting you call the shots each month.
|
Equal Housing
Opportunity