What is an Option Arm?
2. How will I know an option ARM when I see it? 3. What are the advantages of an option ARM? 4. What are the risks of an option ARM? 5. How do I protect myself against the risks? 6. Who should select an option ARM? 7. Should I shop for an option ARM? What Is an Option ARM? It is an ARM on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a “minimum” payment that is usually less than the interest-only payment. The minimum payment option results in a growing loan balance, termed “negative amortization”. How Will I Know an Option ARM When I See One? Ask the loan provider if the rate adjusts monthly, and if negative amortization is allowed. If the answer to both questions is “yes”, you almost certainly have one. Their names are all over the lot and include “1 Month Option Arm”, “12 MTA Pay Option ARM,” “Pick a Payment Loan”, “1-Month MTA”, “Cash Flow Option L
An option ARM is a loan program that provides borrowers with a choice of payment methods: fully amortizing over 30 years, fully amortizing over 15 years, interest-only payments, or a payment based on a below-market “payment rate” which fails to cover even the interest which is due. In such an arrangement, the difference between what you actually owe and what you are paying is added onto the outstanding loan balance each month, a condition known as “negative amortization.
