| Option ARM home loans are one of a growing number of loan products that help families realize the dream of home ownership. Option ARM mortgage loans are adjustable rate loans that allow home owners to choose among different payment options. These include interest only (pays interest owed but nothing on the principal), option ARM minimum payment (pay less than the interest owed and nothing on the principal) and amortized payments (which include principal and interest). Should you consider option ARM loans? Read on for some useful tips to help you decide.
Know the Facts about Option ARM Home Loans
Option ARM home loans usually begin with a low initial interest rate period. This rate is often lower than prevailing rates. Borrowers that make only the minimum payment should understand that the difference between what is paid and what is owed will be added to their loan balance. This is called negative amortization. The combination of negative amortization and increased interest rates could result in payment shock. With payment shock, borrowers experience such a significant increase in the monthly payment amount that they may not be able to comfortably make the payments.
Option ARM loan caps may delay payment shock. In the early years of an option ARM mortgage loan cap, the amount by which monthly payments increase. This ride is temporary. When the loan is recast or recalculated (option ARM lenders recalculate your payment amount based on how many years are left on the loan) the adjusted payment amount is not subject to the loan caps.
Option ARM Lenders May Suspend Your Payment Options Prematurely
Unpaid interest amounts are added to the outstanding loan balance. When the option ARM loan balance exceeds a predetermined amount, usually 125 percent of your original mortgage, the payment options are suspended and the loan is recast. At this point, borrowers are at risk fro payment shock.
Deciding if you are a good candidate for option ARM loans requires thorough research. You can use an option ARM worksheet or calculator to create a numerical picture of the products pros and cons. You should also take a close look at your current, as well as projected, budget and expenses.
Potential option ARM home mortgage borrowers should talk with their loan broker or lender to learn about the product’s terms and conditions. Use what you learn during your research to negotiate knowledgeably for the best deal. Also, let your lender earn your business. Tell them that you have been shopping around and share what you like about what the other lenders have to say.
The risks with Options ARM loans cannot be overstated. Consider an alternative if your reveals this type of loan is not the best option for you. These include:
- First time buyer and community financing programs
- More affordable housing
- Delaying your home purchase until your financial position changes.
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