Option ARM Explained

Option ARM loans have many other names including: "Choice Pay," "Personally Tailored Mortgage," the "Mortgage Stretch," "Cash Flow ARM," "Flex Pay," "Advantage ARM," the list goes on and on. Most of these products share the same general features.

Here are the general features that these loans share:

• "These loans carry an adjustable rate that is tied to some index. The index could be the One year Treasury Bill, the Monthly Treasury Average, the London Interbank Offering Rate (LIBOR), or the COFI (Cost of funds Index etc"
• " The loans allow multiple payment plans. Typically, the borrower will receive a monthly statement that outlines the current interest rate and loan balance. It will also show four different payments based upon different criteria. (Realty Times June 23rd 2005) "
• Here are a list of the monthly payment options (from smallest monthly payment to greatest):

1. The "minimum payment" which is calculated based upon some pre-determined criteria. The minimum payment is usually less than the interest charged for the month, resulting in "negative amortization," or the more politically correct term, "deferred interest." It's very important to understand that making payments with negative amortization results in a rise in loan balance, to cover the interest not paid. (Realty Times June 23rd 2005) "
2. "Interest only" payment, which is equal to the interest charge for that month. Meaning that the loan balance remains the same.
3. 30 Year Amortization Payment
4. 15 Year Amortazion Payment

These option ARMs can be dangerous. They are often diffucult for the average homebuyer to understand. They also carry a high degree of risk if the homeowner generally pays the minimium payment or the Interest Only option. These loans can be useful for workers who have have a variable income (business owners, contractors etc.) . However, these loans are just another way for lenders to keep monthly payments down and get more people into homes.