What Are Option ARM Loans?
An Option ARM loan is an adjustable rate mortgage consumers use to finance the purchase of a home. An Option ARM offers flexibility in making payments, allowing payments to vary from month to month.
Other People Are Reading
-
Interest Rates
-
After an introductory period of one to six months, the interest rate on an Option ARM adjusts monthly. The interest rate is tied to an index rate, such as the rate of return on U.S. Treasury bills or the London Interbank Offered Rate (LIBOR). Usually, how much the rate can increase or decrease each year is capped.
Low Payments
-
An Option ARM loan allows a person to choose how much he wants to pay each month. The borrower can make a minimum payment or an interest-only payment. The interest-only payment covers just the interest that accrued that month; a minimum payment is often lower than an interest-only payment.
-
Term Payments
-
Option ARMs also offer terms of either 15 or 30 years to pay off the loan. One of the payment options is to pay the amount that will keep a borrower on a 15- or 30-year payoff schedule.
Negative Amortization
-
Negative amortization occurs when a monthly payment does not cover the accrued interest on a loan. For example, if the loan accrued $700 in interest during the month but a homeowner only paid $600, the principal of the loan would increase by $100. Negative amortization allows a homeowner to make smaller payments at the start of the loan, but she will have to make larger payments later to make up for doing so.
Dangers
-
By making payments that are lower than the amount of interest charged on the loan, a borrower will end up increasing his debt even if he makes the minimum payment.
-
