What is an Option ARM loan?
The Pay Option ARM is a monthly adjustable rate mortgage. The interest rate you owe can change monthly – going either up or down. However, the minimum monthly payment you are required to pay generally only changes once a year. If your interest rate increases in a given month, but you don’t increase the amount of your monthly payment, then it is likely that the monthly payment will not be enough to pay all the interest due plus principal for that month. If this occurs, the unpaid principal balance you owe will increase.
Option ARM loans provide a number of payment options each month ranging from a minimum payment to the full principal and interest payment. This type of loan has become very popular in recent years as it allows first-time homebuyers to purchase a home with a low monthly payment. How Does an Option ARM Loan Work? Option ARM Loans are an adjustable-rate mortgage (also known as ARM) that provides you up to four payment options each month. The lender sends a monthly statement with up to four payment options, and you select the amount you want to pay and send the slip back with your payment. Most common Option ARM Loan Monthly Payment Options are: • Minimum Payment: Because this payment is low, it’s useful for months when you don’t have much cash on hand. Unpaid interest gets added to the principal of Option ARM Loans. • Interest Only: You pay the interest, but none of the principal. This doesn’t reduce your balance, but avoids deferring interest. • 30-Year Amortized: This matches the monthl
