Most mortgages come with the same payment amount each month. What happens if your cash flow isn’t regular enough for a large mortgage payment every month? Some mortgage lenders and brokers will try and talk you into an “option” mortgage; these mortgages can be useful financial tools, if you understand what you are getting into. Here are tips to help you weigh the risks of a so called “flexible payment” mortgage loan.
Option Adjustable Rate Mortgages are the riskiest mortgage loan known to man. During the “option period” of the loan your mortgage statement will come with four payment amounts. It is important to note that the option period only lasts for a period of time specified in your loan contract. When the option period ends the mortgage lender will convert your mortgage to a standard Adjustable Rate Mortgage amortized with the remaining term length.
How do flexible payments work? When you get your mortgage statement there will be four payment amounts you can choose to pay. You pay the amount you choose. The four payment amounts are: a payment based on 30 year amortization, 15 year amortization, interest-only, and the “optional” minimum payment. This minimum option does not cover all the interest due any month you select it. The interest that remains unpaid is tacked onto your mortgage balance. This “growing mortgage” phenomenon is called negative amortization; it means instead of gradually paying down your mortgage over time, your mortgage loan is growing with time.
Understanding the fine print is important when deciding if this mortgage loan is right for you. Many people get sucked into making the minimum payment every month; if you do this for five years when your option period ends and the lender converts your mortgage, you will see your monthly payment skyrocket. There are laws protecting homeowners somewhat; if your loan grows past a certain threshold, usually no more than 25%, the lender is required to terminate the option and re-amortize your mortgage.
Option Adjustable Rate Mortgages are risky and complicated mortgages. You should not finance your home with one of these unless you know what you’re doing and fully understand the risk. You can learn more about your mortgage options by registering for a free mortgage guidebook: “Five Things You Need to Know About Your Mortgage” using the links below.
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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of “Mortgage Refinancing: What You Need to Know, " which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit .
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