Payment Option ARM: Negative Amortization Mortgages How Do These Refinance Loans Work?


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A payment option ARM is an adjustable rate mortgage with a low initial monthly payment that will increase each year for the first five years. Some banks, like World Saving Bank, call these “Pick a Payment” mortgages because they offer payment options to help you budget your monthly cash flow. These payment option mortgage loans are different and a bit more complex than other products, because you can choose the payment you wish to make each month. Some of these payment options involve paying less than the interest, which means an increasing mortgage balance instead of the principle being paid down. There are inherent risks to this, but you have more flexibility and they may be a good decision if your home equity increases faster than the negative amortization.

A payment option ARM gives you these monthly payment choices:

  • Principal & Interest (Fully Amortized Payment )
  • Interest Only
  • Negative Amortization (Paying less than the interest)
  • Option ARM MTA
  • Option ARM COFI

    The benefits of an option ARM are low payments and the fact that rates and payments may go down if rates improve. You may also qualify for higher loan amounts and there are no balloon payments.

    The risks however are higher with an option ARM than with many other loans. John Dugan, the head of the Office of the Comptroller of Currency, which regulates financial institutions, said in a recent speech before the Consumer Federation of America. “The fundamental problem with payment option ARMs, other than the growing principal balance due to negative amortization, is payment shock. " Your payments may change over time and there is a potential for higher payments if rates increase.

    You also will have more difficulty getting a second mortgage behind negative ARM loans. If you are hoping to use your home as a source of equity, you may want to consider a standard variable rate mortgage or a fixed-rate mortgage. This way you will be building equity that can be used for a credit line or other secured loan for improvements or even debt consolidation.

    An option ARM can be a confusing mortgage and you may want to read as much literature on it as you can. Washington Mutual mortgage has some more complete explanations on their website. With a little bit of reading, you can decide if the option ARM is right for you.

    Rebecca is a respected writer and article contributor to the Desert Magazine and Los Angeles Times. Please visit these additional resource websites: To get a free loan quote for a 125 home equity loans for people with all types of credit, please check out the special loan offers for lower payments. If you need more loan advice about negative amortization loans, take a look at the flexible programs offered for Payment Option ARM Mortgage Refinancing .

    For the latest interest rates for fixed rate mortgages and interest only credit lines, please visit the online resources at BD Second Mortgage & Equity Loans .

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