The Option ARM - Adjustable Rate Mortgage- can be a great loan for the right borrower. This article will outline the OPtion ARM and the mechanics and benefits of this great loan product. It is not right for everyone, but is very right for some!
I have written other articles that cover the basics of Adjustable-Rate Mortgages in general but I will reiterate the basics here, and then we will look at the Option Arm, which is a special ARM loan.
First, let's review ARM loans.
Every ARM has three major components which you definitely need to understand before you sign on for one:
1. INDEX - this is the basic rate-setter, and is a statistic such as LIBOR (London Interbank Offering Rate), Monthly Treasury Average (MTA or other such indices. To this index is added:
2. Margin - an amount above the Index which is added to compute the basic loan rate.
So an ARM's interest rate= Index Margin.
Now there are limits to how high a rate can go on an ARM and that is called the “Cap Rate. " There are actually 2 caps, a “Lifetime Cap" and another cap rate from term to term, whenever the loan is allowed to re-set, be that from month to month or every 6 months or once a year.
Make sure you understand all these factors when you engage in an ARM
That being said, here is a product called the Option ARM, originally offered by World Savings Bank.
An Option ARM gives a borrower four monthly payment options:
1. Pay an amortized principle and interest payment at the current ARM rate. This would be the norm.
2. Have a low income month and pay interest only on the loan that month.
3. Have an extremely bad income month and pay less than the current interest month and they will add the difference to the outstanding loan balance, increasing your loan principle. This is called “negative amortization. "
4. Have a great income month and pay additional principle to pay down your loan faster, as a 15 year versus a 30 year loan.
Every month you can decide which payment to make. For some people, whose income fluctuates, this is a great loan to have. It is really for people with pretty good credit and who have the fiscal discipline to make the right decision every month, who are responsible.
The flexibility of payments can be helpful. For example you are a CPA or tax preparer and in tax season you make good money, then the rest of the year your income drops. So during those good months you pay extra to pay down your principle, and during lean months you just choose the amortizing, interest only or even the neg am payment options.
Or you are in retail and have a great holiday season and then some “dry" months.
I strongly recommend you speak with a qualified mortgage planner or financial planner to analyze your overall yearly income stream and help you to decide if this is the right loan for you.
Please visit James at http://swifthussherrealestate.com for mortgage needs. Apply online, check current offered rates and loan programs and more!