This loan program is an
adjustable rate mortgage with added flexibility of making one of several
possible payments on your mortgage every month, in order to better
manage your monthly cash flow.
It's low introductory start rate allows you to make very low initial
mortgage payments and low qualifying rates enable you to qualify
for more home.
The minimum payment option can help keep your monthly payments
affordable. If the minimum monthly payment is not sufficient to
pay the monthly interest due, you can always avoid deferred interest
by choosing the interest-only payment option.
With the Option ARM, you generally have at least two fully amortized
payment choices, leading to a quicker loan payoff. If you prefer
to pay off your loan on schedule, you can make the fully amortized
payment based on a 30-year loan, or you can choose the 15-year payment
option for the fastest equity build-up.
In most cases, you can also make additional principal payments
which reduce the amount you need to pay in later months.
Option ARM loan programs are right for you if you'd like to own
your property only for a short time, and prefer affordability and
flexibility in your monthly payment. However, if you select the
minimum payment option in the early years, you should be prepared
for possible sudden increases in your monthly payments thereafter.
Option ARM loans have four major types of payment options:
- Minimum Payment
With the minimum payment option, your monthly payment is set
for 12 months at your initial interest rate. After that, the payment
changes annually, and a payment cap limits how much it can increase
or decrease each year.
- Interest-Only Payment
With the interest-only payment option, you can avoid deferred
interest, when the minimum payment is not enough to pay the monthly
interest due. The interest-only payment option, however, is not
available if the interest-only payment would be less than the minimum
payment. Please note, that this payment option does not result
in your principal reduction.
- Fully Amortizing 30-Year Payment
With fully amortizing payments, you pay both principal and
interest. Your payment is calculated each month based on the prior
month's interest rate, loan balance and remaining loan term.
- Fully Amortizing 15-Year Payment
If you can afford higher monthly payments, the 15-year payment
option allows you to repay your loan twice as faster and save more
than half the total interest costs of a 30-year loan. Please note,
that this payment option is offered only on the 30-year (or 40-year)
term. It will cease to be an option when the loan has been paid
to its 16th year.
These options should be clearly marked on your loan statement,
so it is very easy to figure out how much you should pay each month.
Just enter the correct amount in the payment coupon section of your
statement.
Option ARM loan programs are becoming more and more popular today,
and there are many variations of this innovative home financing
product on the market: Pay Option ARM, Pick-A-Payment Loan, 1 Month
Option ARM, Cash Flow Option Loan, LIBOR (or 12-MAT) Pay Option
Loan, etc. If you are thinking about applying for an option ARM,
it is important to shop carefully and investigate several loan products,
to find the one best for you.
Option ARM loan programs may vary in the initial rate, negative
amortization and lifetime caps, ARM index, or optional features,
however, when comparing one option ARM with another, pay close attention
to the margin and the fully indexed rate. Keep in mind that the
initial interest rate holds only for the 1st month.
What features to compare with
different Option ARM loans?
Loan
Term
Option ARM loans are available for 30 or 15 years. *
Initial
Interest Rate
Your Minimum Payment Rate or 'Start Rate'. It may vary from 1.25%
up to 3.95% and depends on your Loan-to-Value Ratio (LTV).
Initial
Interest Rate Period
The initial interest rate holds only for the first month, thereafter
the interest rate may change monthly.
Fully
Indexed Rate
The sum of the margin and the most recent index figure available
prior to a scheduled interest rate change date. Subject to the
interest rate caps.
Interest
Rate Adjustment Period
The time between interest rate adjustment dates. With option
ARMs, the adjustment period is usually set to 1 month: the fully
indexed rate may not change more than once every month based on
the movement of the index.
Maximum
Rate
See: Lifetime Cap.
Lifetime
Cap
A lifetime cap limits the interest rate increase over the life
of the loan. It protects you financially and usually is expressed
as maximum rate. Lifetime caps may vary from 9%-10% up to 19%.
Lifetime
Floor
See: Margin.
Minimum
Payment
The minimum payment is calculated using the initial interest
rate (start rate) for the first 12 months. Thereafter, it is recalculated
annually.
Minimum
Payment Adjustment Period
The minimum payment adjustment period is usually set to 12 months,
unless negative amortization limit is reached.
Minimum
Payment Change Cap
A limit on how much the minimum monthly payment can change at
each adjustment. With most option ARMs, your payment cap will be
7.5% of minimum payment amount in first five years. It means that
on any Payment Change Date, the minimum payment cannot increase
or decrease by more than 7.50% (unless the loan is
recast or the negative amortization limit is reached).
Negative
Amortization Cap (Also known as: Balance Cap,
Negative Amortization Limit, Negative Amortization Ceiling)
It limits the loss of equity in your home when low monthly payments
do not cover fully the interest rate charges agreed upon in the
mortgage contract and is usually set to 110% - 125% of your original
principal balance. When the negative amortization limit is reached,
the minimum payment increases immediately: the payment required
to fully amortize the loan over the remaining term becomes the
new minimum payment, and the payment cap does not apply.
Payment
Recast Period
Another way of limiting negative amortization. Option ARMs are
recast every five years (or sooner, if the negative amortization
limit is reached). When the loan is recast, the payment required
to fully amortize the loan over the remaining term becomes the
new minimum payment, and the payment cap does not apply.
Index
Options
Your interest rate is usually based on one of the following indexes:
- Monthly Treasury Average (MTA)
- Cost of Savings Index (COSI)
- London InterBank Offered Rate (LIBOR)
- 11th District Cost Of Funds Index (COFI)
These indexes change once a month.
Click on index title for explanations and current values. For
historical values of the most frequently used indexes, click here.
Margin
The number of percentage points (for example, 2.75) the lender
adds to the index rate to calculate the ARM interest rate at each
adjustment. The margin is set in the mortgage contract,
remains fixed for the term of the loan and is not impacted by the
financial markets and movement of interest rates.
Caps
Option ARMs don't have First Interest Change Cap or Periodic
Interest Change Cap.
They have:
- Lifetime Cap (or Maximum Rate)
- Lifetime Floor (or Margin)
- Payment Cap (or Minimum Payment Change Cap)
- Balance Cap (or Negative Amortization Limit)
Documentation
Types
Full doc, Limited doc, Low doc, Stated Income, No Income\No Asset
(NINA), Stated Income\Stated Assets (SISA). Read more about Loan
Documentation Requirements. Click here for a list of documents
most lenders will require in order to process your mortgage application.
Loan Program Variations / Options / Special Features
Initial
Fixed Rate Period
An option ARM loan may have an
initial fixed rate / fixed minimum payment period of 3 or 5 years
between the time the loan is originated and the first interest
rate change date. After the initial period the loan converts to
monthly adjustable Option ARM (the interest rate adjusts every
month and you will have payment options).
40-Year
Term
Some option ARM loans, for a fee (or for an increase in your
rate), contain a provision permitting you to increase the term
of the loan from 30 to 40 years.
Bi-Weekly
Payments
Some lenders offer optional bi-weekly payment plans with option
ARMs. With bi-weekly mortgage plan you pay half of the monthly
mortgage payment every 2 weeks. It allows you to repay a loan much
faster. For example, a 30 year loan can be paid off within 18 to
19 years.
Conversion
Option
The interest rate or points may be somewhat higher for a convertible
option ARM, and it also may require a small fee at the time of
conversion.
Mortgage Professionals Offering Option ARM Loans
If you are looking for an option ARM and need more information
or advice, we invite you to take advantage of our database of the
most competitive lenders available. Just complete a short loan
request form and the best lenders in your local area offering option
ARM loan programs will contact you with their rates and fees.
