Are Option Pay ARMs Risky?
The general consensus about the riskiness of Option Pay mortgage loans is that they are high risk; high risk to both the borrower and the lender. To add even more risk to the loans, consumers and loan officers not only have to understand initial and lifetime caps, various indicies and margins, but also teaser rates, prepayment penalties, negative amortization caps, and moving indices. What we end up with is a risky, popular, and often misunderstood mortgage loan. Known as an Option Pay mortgage, it’s an adjustable-rate mortgage that typically allows borrowers to choose one of four different payments each month. From smallest to largest, they are: a minimum monthly payment, an interest-only payment, full principal and interest amortized over 30 years, or full principal and interest over 15 years. Those who choose the interest only payment pay no principal each month, but they pay the full amount of interest due. Those who choose the minimum payment pay no principal and less interest tha
