How to Get an Option ARM Mortgage

By eHow Personal Finance Editor

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The smart way to get a loan for most people is to look at all the options and consider what's best for the family situation. An option ARM mortgage is not right for most, but some people, especially those with irregular incomes, may benefit from the flexibility they offer. Here's how to get an option ARM mortgage the smart way.

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Instructions

Difficulty: Moderate

Step1

Make sure the option ARM mortgage is available in your area. Contact a lender and be sure your state lending institution allows this type of loan.

Step2

Understand the options. The options on an ARM are mind boggling, but here are a couple of options. The one month fixes the rate for one month at a low percentage, then raises it the second month, which is great if you plan on selling the house in that month, but for little else. Another option is the LIBOR ARM, which fixes the rate for a period of years, for example say seven years, then adjust it with market conditions.

Step3

Shop lenders. A great place to start your search for an option ARM mortgage is Bankrate.

Step4

Check any prepayment penalties. Once you have one of these loans, you may need to get out. Make sure your lender doesn't have a pre-payment penalty with the option ARM contract.

Step5

Know your payment schedule. Ask to see the payment schedule and read the whole schedule. The minimum payment on an option ARM can actually make what you owe on your home higher each month.

Tips & Warnings

Try buying a smaller, more affordable house, or renting from a private owner instead of jumping into one of these mortgages.
Read all the fine print and have a trusted friend or family member look over the terms with you before you sign.
Don't be fooled by the minimum payment. The whole idea of a loan is to pay a portion towards the balance each month so you eventually own your home.
Many of these types of loans have a recalculation period, which means that they recalculate what you owe on the home and interest, and base this on how many years you have left to pay on the loan.
If you select to pay the interest only on your option ARM mortgage, you are essentially renting your house from the bank, except you are responsible for all the maintenance, yard work and taxes.