What is an Option ARM Mortgage?
The idea of Option ARM is to give borrower the option to defer the interest payable to lender on the money borrowed, till assets exceed the debts. The Option ARMs have start rate (sometimes called teaser rate) that is very low, sometimes as low as 1%, while the general market rate for ARMs is, say 6%. So, how come a lender gives you money at 1%? Well, actually, he does not. He gives you loan at, say, full 6%, but asks you to pay interest only according to 1%. The difference in the payment is added to the principal balance of the loan, every payment period. So, as the time progresses, the principal balance keeps increasing. This is not the case in interest only loans, where the borrower does not pay anything towards principal, but the principal never goes up. In traditional principal + interest loans, there is some component of the payment that goes towards principal. Lender will allow the loan amount to increase upto a maximum value e.g. 110% of the initial balance. When the loan balan
