These options should be clearly marked on your loan statement, so it is very easy to figure out how much you should pay each month. Just enter the correct amount in the payment coupon section of your statement.

Option ARM loan programs are becoming more and more popular today, and there are many variations of this innovative home financing product on the market: Pay Option ARM, CashFlow Option Loan, 1-Month Option ARM, Flex 5 Home Loan, Pick-a-Payment^sm Loan, 12 MAT ARM, Option Power ARM, FlexPay® 12 MAT, FlexPay® 3/1 LIBOR ARM, OptPAY ARM, etc. If you are thinking about applying for an option ARM, it is important to shop carefully and investigate several loan products, to find the one best for you.

Option ARM loan programs may vary in the initial rate, negative amortization and lifetime caps, ARM index, or optional features, however, when comparing one option ARM with another, pay close attention to the margin and the fully indexed rate. Keep in mind that the initial interest rate holds only for the 1st month.

What features to compare with different Option ARM loans?

Loan Term

Option ARM loans are available for 30 or 15 years.

Initial Interest Rate (Note Rate)

Your Minimum Payment Rate or 'Start Rate'. It may vary from 1.25% up to 3.95% and depends on your Loan-to-Value Ratio (LTV).

With hybrid option ARMs, that use a different minimum payment calculation method, your initial rate is usually higher.

Initial Interest Rate Period (Introductory Period, Initial Fixed-Rate Period)

Option ARM loans are available with an initial introductory period, usually of 1, 3 or 6 months, after which the interest rate may change.

Notes:

• Some option ARM are currently offered without any introductory period, so the fully indexed rate (FIR) is effective immediately.
• The initial Fixed-Rate Period should not be confused with Initial Fixed-Rate / Fixed-Payment Period, a typical feature of hybrid option ARMs.

Examples:

• With 1-month option ARMs that have a 1-month introductory period, the first interest rate change occurs when the 1st monthly payment is due. Thereafter, the interest rate may change monthly. 
• If you have a 1-month option ARM loan with a 3-month introductory period, the first interest rate change occurs when the 3rd monthly payment is due. Subsequent interest rate changes may occur each month thereafter.

During the introductory period:

After the introductory period:

Monthly Payment = Minimum Payment Interest Rate = Start Rate

Monthly Payment = Minimum Payment or Interest-Only Payment or Fully Amortizing 30-Year or Fully Amortizing 15-Year Interest Rate = Periodic adjustments after the introductory period: Event Loan Feature Change Frequency Cap Monthly Interest Rate Adjustment Fully Indexed Rate Monthly Lifetime Cap Annual Minimum Payment Change Minimum Payment Annually Payment Change Cap Loan Recast Minimum Payment Every 5th Year None Other adjustments: Event Loan Feature Change Frequency Cap Loan Recast negative amortization limit is reached) Minimum Payment Irregularly None Fully Indexed Rate (FIR) The sum of the margin and the most recent index figure available prior to a scheduled interest rate change date. Subject to the interest rate caps. Note: Your interest rate can be equal to the index rate plus the margin exactly, or it can be rounded to the nearest one-eighth of one percentage point (.125%). Example: Index: 4.733 MTA as of August 2007) Margin: 2.5% Fully Indexed Rate ('as it is'): 7.125% ( = index + margin ) Fully Indexed Rate (rounded to the nearest 0.125%): 7.625% Interest Rate Adjustment Period The time between interest rate adjustment dates. With option ARMs, the adjustment period is usually set to 1 month: the fully indexed rate may not change more than once every month based on the movement of the index. Maximum Rate (Interest Rate Ceiling) See: Lifetime Cap. Lifetime Cap A lifetime cap limits the interest rate increase over the life of the loan. It protects you financially and usually is expressed as maximum rate. Lifetime caps may vary from 9%-10% up to 19%. Lifetime Floor (Life Floor, Lifetime Rate Floor) The lifetime floor is never lower than the margin. See: Margin. Minimum Payment Initially (for the first 12 months), the minimum payment is calculated using the start rate, the amount you borrow and the loan term. Thereafter, it is recalculated annually. Example: Loan Amount: $200,000.00 Initial Rate: 1.25% Index: 4.933 MTA as of August 2007) Margin: 2.75% Payment Cap: 7.5% Fully Indexed Rate: 7.683% ( = index + margin Fully Indexed Rate (rounded to the nearest .125%): 7.625% Minimum Payment Changes: Year 1 $666.50 = Base of Minimum Payment Year 2 $716.49 = $666.50 + 7.50% Year 3 $770.22 = $716.49 + 7.50% Year 4 $827.99 = $770.22 + 7.50% Year 5 $890.09 = $827.99 + 7.50% Minimum Payment Adjustment Period The minimum payment adjustment period is usually set to 12 months, unless negative amortization limit is reached. Minimum Payment Change Cap A limit on how much the minimum monthly payment can change at each adjustment. With most option ARMs, your payment cap will be 7.5% of minimum payment amount in first five years. It means that on any Payment Change Date, the minimum payment cannot increase or decrease by more than 7.50% (unless the loan is recast or the negative amortization limit is reached). Note: With some loans, the minimum payment is subject to a 7.5% increase with no limit on the decrease (in a declining interest rates environment). Negative Amortization Cap (Balance Cap, Negative Amortization Limit, Negative Amortization Ceiling) It limits the loss of equity in your home when low monthly payments do not cover fully the interest rate charges agreed upon in the mortgage contract and is usually set to 110% - 125% of your original principal balance.  When the negative amortization limit is reached, the minimum payment increases immediately: the payment required to fully amortize the loan over the remaining term becomes the new minimum payment, and the payment cap does not apply. Payment Recast Period Recasting (or re-calculating your loan) is another way of limiting negative amortization and keeping your loan on the original schedule. The main purpose of recasting is ensure the loan is paid off within the scheduled amortization period. Option ARM loans are usually recast every five or ten years (or sooner, if the negative amortization limit is reached). This re-calculation (or re-amortization) is based on the outstanding principal balance, the remaining term and the fully indexed rate. When the loan is recast, the payment required to fully amortize the loan over the remaining term becomes the new minimum payment, and the payment cap does not apply (the payment cup, however, will go back into effect immediately after the recast, and will hold until the next time your loan is recast). Standard 5-Year (10-Year) Recast vs. Negative Amortization Limit Recast The 1st Standard 5-Year Recast occurs when the 61st payment is due. Subsequent Standard 5-Year Recasts occur each 60 months thereafter. A new minimum payment is calculated for the payment due on the 61st month based on the fully indexed rate at that time, the remaining term of the loan and the loan balance at that time. There are no other payment options for this (61st) month. This new recast payment becomes the new minimum payment for the upcoming 12 months subject to a 7.5% (or whatever your payment cap is) increase the following 12 months and subject to a full recast 5 years from this payment recast, i.e. when the 121st payment is due. The 1st Negative Amortization Limit Recast occurs when (or if) the negative amortization cap is reached. The loan is automatically recast for the remaining portion of the standard recast term (5 years) and then subject to recast at the normal scheduled (5 year) recast period. For example, if the loan reaches the negative amortization cap on month 59, the loan goes through a Negative Amortization Limit Recast. At the end of the 5th year, on the 61st month, the loan goes through a scheduled Standard 5-Year Recast. Index Options Your interest rate is usually based on one of the following indexes: Monthly Treasury Average (MTA) Cost of Savings Index (COSI) London InterBank Offered Rate (LIBOR) 11th District Cost Of Funds Index (COFI) These indexes change once a month. Click on index title for explanations. Click here for current and historical values. Historical performance of the four most popular option ARM indexes over the last 14 years. Generally, lenders use the most recent Index figure available as of the date 15 days before each interest rate adjustment date. This Index value is called the 'Current Index'. Margin The number of percentage points (for example, 2.75) the lender adds to the index rate to calculate the ARM interest rate at each adjustment. The margin is set in the mortgage contract, remains fixed for the term of the loan and is not impacted by the financial markets and movement of interest rates. Caps Option ARMs don't have First Interest Change Cap or Periodic Interest Change Cap*. Initial and periodic interest rate changes are not capped and move with the market, as long as the rate adjustments do not exceed the lifetime cap. The interest rate cannot adjust lower than the lifetime floor. Option ARM loans have: Lifetime Cap (or Maximum Rate) Lifetime Floor (or Margin) Payment Cap (or Minimum Payment Change Cap) Balance Cap (or Negative Amortization Limit) * This is not the case with so-called hybrid (combined) option ARMs. Hybrid option ARM loan programs usually have both First Interest Change Cap and Periodic Interest Change Cap, however, their minimum payment adjustments are not capped (i.e. there is no Payment Cap). Both hybrid and standard option ARMs have Balance Cap (a. k. a. Negative Amortization Limit). Documentation Types Full doc, Limited doc, Low doc, Stated Income, No Income\No Asset (NINA), Stated Income\Stated Assets (SISA). Read more about Loan Documentation Requirements. Click here for a list of documents most lenders will require in order to process your mortgage application. Loan Program Variations / Options / Special Features Initial Fixed Rate Period Option ARM loans may have an initial fixed rate period between the time the loan is originated and the first interest rate change date. After the initial fixed period the loan usually converts to a monthly-adjustable option ARM. Hybrid Option ARM loan programs have either an initial fixed payment period or an initial fixed rate / fixed minimum payment period of 3 to 7 years. 40-Year Term Some option ARM loans, for a fee (or for an increase in your rate), contain a provision permitting you to increase the term of the loan from 30 to 40 years. Bi-Weekly Payments Some lenders offer optional bi-weekly payment plans with option ARMs. With bi-weekly mortgage plan you pay half of the monthly mortgage payment every 2 weeks. It allows you to repay a loan much faster. For example, a 30 year loan can be paid off within 18 to 19 years. Conversion Option The interest rate or points may be somewhat higher for a convertible option ARM, and it also may require a small fee at the time of conversion. Option ARM Calculator { See also: Advanced Option ARM Loan Amortization Calculator } Loan Amount: $ Initial Rate: % Index: 4.933 (MTA as of August 2007) 5.480 (1-Month LIBOR as of August) 4.277 (COFI as of July) 4.790 (COSI as of August) Other: Margin: % Fully Indexed Rate: 7.683% ( = index + margin ) Minimum Payment: $666.50 ( Deferred Interest: $614.00 ) Interest Only Payment: $1,280.50 Fully Amortizing 30-Year Payment: $1,423.58 Fully Amortizing 15-Year Payment: $1,874.88 Fully Amortizing 40-Year Payment: $1,343.27 Mortgage Professionals Offering Option ARM Loans In this article we have described only some of the features offered with option ARM loan products. If you are looking for an option ARM and need more information or advice, we invite you to take advantage of our database of the most competitive lenders, brokers and loan consultants available. Just complete a short loan request form and the best mortgage professionals in your local area offering option ARM loan programs will contact you with their rates and fees. Imagine an adjustable rate mortgage that allows you to pick one of four payment options on your monthly mortgage bill. It is an ARM on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a "minimum" payment that may be less than the interest-only payment. The minimum payment option results in a growing loan balance, termed "negative amortization". How Will I Know an Option ARM When I See One? Ask the loan officer if the mortgage has more than oe payment option. Does the rate adjusts monthly, and if negative amortization is allowed. If the answer to both questions is "yes", you almost certainly have an Option ARM. Their names are all over the map and include "1 Month Option Arm", "12 MTA Pay Option ARM," "Pick a Payment Loan", "1-Month MTA", "Cash Flow Option Loan", and "Pay Option ARM". What Are the Advantages of an Option ARM? Their main selling point is the low minimum payment in year 1. It is calculated at the interest rate in month 1, which can be as low as 1%, and it rises by only 7.5 % a year for some years. The low initial payment allows borrowers to buy a more expensive home than they would be able to afford. Other reasons are to use the monthly payment savings for other purposes, like: paying down the principle, and amortizing credit card debt. Be aware that they seldom explain the risks. What’s Are the Risks of an Option ARM? For those electing the minimum payment option, the major risk is "payment shock" – a sudden and sharp increase in the payment for which they are not prepared. The rule that the minimum payment can rise by no more than 7.5% a year has two exceptions. The first is that every 5 or 10 years the payment must be "recast" to become fully-amortizing. It is raised to the amount that will pay off the loan within the remaining term at the then current interest rate – regardless of how large an increase in payment is required. The second exception is that the loan balance cannot exceed a negative amortization maximum, which can range from 110% to 125% of the original loan balance. If the balance hits the negative amortization maximum, which can happen before 5 years have elapsed if interest rates have gone up, the payment is immediately raised to the fully amortizing level. Either the recast provision or the negative amortization cap can result in serious payment shock. That is why I tell my clients that unless you have a financial plan for paying the minimum payment, always pay the Interest Only Option or higher. How Do I Protect Myself Against The Risks? First of all, if you can't maintain financial discipline do not engage in this type of loan. You will be tempted to pay the minimum payment from day one. When it recasts, you will be stuck between a rock and a hard place. If you have sound financial principles, and can adhere to them, go for it. Make sure your loan officer discloses the margin. The lower the margin, the lower your cost and your vulnerability to payment shock. You can also minimize the risk by taking the highest initial payment you can afford. The higher your initial payment, the smaller the potential payment shock down the road. February 22, 2007 Here is what you will learn in this tutorial: 1. What is an option ARM? 2. How will I know an option ARM when I see it? 3. What are the advantages of an option ARM? 4. What are the risks of an option ARM? 5. How do I protect myself against the risks? 6. Who should select an option ARM? 7. Should I shop for an option ARM? What Is an Option ARM? It is an ARM on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a "minimum" payment that is usually less than the interest-only payment. The minimum payment option results in a growing loan balance, termed "negative amortization". How Will I Know an Option ARM When I See One? Ask the loan provider if the rate adjusts monthly, and if negative amortization is allowed. If the answer to both questions is "yes", you almost certainly have one. Their names are all over the lot and include "1 Month Option Arm", "12 MTA Pay Option ARM," "Pick a Payment Loan", "1-Month MTA", "Cash Flow Option Loan", and "Pay Option ARM". What Are the Advantages of an Option ARM? Their main selling point is the low minimum payment in year 1. It is calculated at the interest rate in month 1, which can be as low as 1%, and it rises by only 7.5 % a year for some years. The low initial payment entices some borrowers into buying more costly houses than would have otherwise, or into using the monthly payment savings for other purposes, including investment. You don’t need a list from me of ways to use the cash flow savings because your loan provider is sure to oblige. What they are less likely to give you is a sense of the risks you will face down the road. What’s Are the Risks of an Option ARM? For those electing the minimum payment option, the major risk is "payment shock" – a sudden and sharp increase in the payment for which they are not prepared. The rule that the minimum payment can rise by no more than 7.5% a year has two exceptions. The first is that every 5 or 10 years the payment must be "recast" to become fully-amortizing. It is raised to the amount that will pay off the loan within the remaining term at the then current interest rate – regardless of how large an increase in payment is required. The second exception is that the loan balance cannot exceed a negative amortization maximum, which can range from 110% to 125% of the original loan balance. If the balance hits the negative amortization maximum, which can happen before 5 years have elapsed if interest rtes have gone up, the payment is immediately raised to the fully amortizing level. Either the recast provision or the negative amortization cap can result in serious payment shock. How Do I Protect Myself Against The Risks? Three ways: 1. Measure the Risk: You can do this yourself using my calculator 7ci. It will show you what will happen to the payment on your option ARM if interest rates follow any of a number of future scenarios selected by you. An important side benefit is that the calculator lists the information you need, which you want for shopping purposes anyway. 2. Minimize the Risk by Shopping For the Lowest Margin. The margin on your loan is the amount added to the interest rate index to get your rate. Since the margin affects the rate in months 2-360, it is the most critical price variable on an option ARM. The lower the margin, the lower your cost and your vulnerability to payment shock. Note: The margin is not a required disclosure, so don’t expect that it will necessarily be volunteered. 3. Minimize the Risk by Taking the Highest Initial Payment You Can Afford. The higher your initial payment, the smaller the potential payment shock down the road. Since the initial payment is determined by the interest rate in month 1, you should select the highest rate that results in a payment with which you are comfortable. Asking for a higher rate sounds a little strange, but remember, the quoted rate holds only for one month. Who Should Take an Option ARM? Choose one if your time horizon is short and you want to maximize your home-buying capacity. Because of their low initial rates and payments, borrowers can usually qualify for a larger loan using an option ARM. Since payments will be substantially higher in later years, you should confidently expect your income to rise in the future. The option ARM is also a refinance option if your income has dropped and the alternative to lower payments is default. I do not advise using this instrument to generate cash flow savings to invest, see Is Unused Home Equity a Missed Fortune? Should I Shop For An Option ARM? Yes, emphatically, but not for the rate. Your major focus should be on the margin, because that is what determines your rate after the first month. Your second priority should be the maximum rate. Your third priority should be total lender fees. The good news about monthly ARMs is that lenders don’t reprice them every day as they do other mortgages, which makes comparison shopping much easier. You don’t need a rate lock, but ask the loan provider to specify the margin, maximum rate and fees on paper. Thanks for giving Pay Option Arms the opportunity to give you some insight into pay option arm products as well as allowing us to place your loan requests and inquiries with the nations top specialists in pay option arms. We have done our research and have put together, what we feel, is a top team of pay option arm professionals who will work hard to earn your business or, at least, answer any of your questions regarding this very flexible mortgage tool. Pay option arms can offer you ways to aquire and maintain a property that you may have never thought possible. Our preliminary sign-up, below, can sort out your needs and have the proper specialist contact you with no obligation or pick your State to make contact. Either way, the best way to understand Pay Option Arms is to communicate with someone who really knows this product...you can even give us a call... the next step is yours! Guidelines for pay option arms could allow you a certian comfort zone you could not accomplish with the most other mortgages. With an understanding that pay option arms are as important and respected as any mortgage product in the market place today. Take the time to see if pay option arms is the right path for your primary home, a vacation get a way or, an investment property. Link to a pay option arms professional NOW. No Obligation. Even if you simply want a rate comparison. Pay Option ARMs can adapt to fit your lifestyle. They offer payment options and qualification guideline that can help you reach your mortgage and cash flow goals. More traditional home loan payments are the same each month for the life of the loan. With Pay Option Arms, you can choose from one of four payment choices each month...which allows you the ability to change your monthly payment as your needs change. Pay Options Arms payment Options: 1. Minimum Payment Option 2. Interest-Only Payment Option 3. Fully Amortized Payment Option 4. 15 Year Payment Option 5. 40 Year Payment Option You Consider Pay Option ARMS: To minimize your monthly payment to pay off other debt. To control the tax-deductible interest you pay. To increase your buying power. To offset income fluctuations. To take advantage of future increases in income. Pay Options 15, 30, and 40 year terms Pay the minimum amount to free up funds for other uses, or make larger payments for faster equity build up. Pay Option Arm Loan Features A fixed interest rate for an initial 1-month period; then, the interest rate may change monthly. A minimum payment amount that adjusts anually subject to a 7.5% payment change cap. A 7.5% payment change cap limits how much the minimum monthly payment can rise or fall from the last minimum payment, except on the fifth year of the loan and every five years from there on. A lifetime interest rate cap that protects you by putting a ceiling on how high your interest rate can go. We know Pay Option Arms! Please contact a mortgage professional, with no obligation, to see if pay option arms will work for you. Don't make your decision on media hype or rumors. The right mortgage product could save you thousands of dollars a year. We'll compare Pay Option Arms to Fixed and Interest-Only Rate Quotes Let us show you how there are Thousands of dollars a year at stake! Ask about a new Hybrid Arm Mortgage Whether you have an ARM that has just recently been reset to a higher rate or just want a mortgage with a predictable monthly payment for the life of the loan, our fixed rate mortgages Hybrid Products are a smart move. Fixed-rate Hybrid Arm Mortgages offer: Predictable payments. The monthly principal and interest payment is fixed over the life of the loan. Protection from rising interest rates. No matter how high market interest rates go, your mortgage rate remains the same over the life of your loan. Fixed-Rate Mortgage Alternative: If you plan on staying in your home for less than 10 years, you can possibly save more by refinancing to one of our “hybrid” ARM loans. These loans offer a secure, fixed rate for the initial five, seven or 10 years of your loan. By selecting a hybrid ARM, you get protection from rising rates for only as long as you think you'll need it, while having a smaller mortgage payment every month relative to a longer fixed-rate mortgage. Our Home Mortgage Loan Consultants will work with you to help you determine the right loan for your situation. Contact us today no obligation! After slumping throughout the winter, home prices across much of the count...