Arm mortgage option program

The minimum payment option allows a borrower to pay monthly mortgage payments that are significantly less than the actual interest rate. It seems like a great deal, but every time the borrower elects to makes the minimum payment, the difference between the minimum payment and the interest-only payment is tacked onto the balance of the loan. This allows the typical borrower to pay the minimum payment for roughly the first five years of the life of the loan.

After ten years from the start of the loan, the interest-only option typically goes away as well, and the borrower must pay using one of the two remaining payment options. Typical option ARM programs do not have any caps aside from the lifetime cap of say 9. What many borrowers may not understand is that paying the minimum payment each month is simply a way of deferring interest, not avoiding it altogether.

By making the minimum payment each month, the accrued interest eventually stacks up against the borrower, while effectively building zero home equity. And after five years of paying the minimum payment, the borrower would have a loan balance above their original balance without the flexibility of the minimum payment option. This makes the option ARM a dangerous choice for homeowners, as once the minimum payment option disappears the borrower has no choice but to pay the interest-only payment.

And many borrowers will likely have trouble making the interest-only payment after relying on a much lower minimum payment during earlier years. The only saving grace to this program is housing appreciation and leverage.

While the market was hot, real estate investors were using option-arms to keep cash in their pockets, banking on appreciation until they resold the home years, or even months later. But once every one and their mother was using this type of loan, trouble started brewing.

It probably should have never been introduced to the masses. And the minimum payment increases each year, as well as the accrued interest. They tend to highlight the benefits, mainly the cost savings without mentioning the negative implications.

It combines the safety of a five-year fixed product with the flexibility of an option arm. Monday to Friday 8 a. Eastern Time Mon-Fri 8 a. ET Saturday 8 a. Eastern Time Sat 8 a. Get a call back layer.

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Update rates. Mortgage Rates Table. Rate The rate of interest on a loan, expressed as a percentage. Annual percentage yield APR The annual cost of a loan to a borrower. Points An amount paid to the lender, typically at closing, in order to lower the interest rate. Fixed-rate mortgage A home loan with an interest rate that remains the same for the entire term of the loan. Adjustable-rate mortgage ARM Also called a variable-rate mortgage, an adjustable-rate mortgage has an interest rate that may change periodically during the life of the loan in accordance with changes in an index such as the U.

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