Corporation Option ARM - adjustable rate mortgages in Tennessee, Missouri, Indiana,
Colorado, Mississippi, Alabama and Florida.
A popular mortgage product today is a form of an adjustable rate mortgage (ARM) known as an
Option ARM. With this type of product you have the option to make several different payments, including an extremely low payment which does not cover the interest accrued each month. These are sometimes known as ‘pick-a-payment’ loans.
When required mortgage payments are less than the amount necessary to pay interest, effectively one is building up a balance of interest owed, which decreases the equity in a property. This is known as ‘negative amortization.’ Instead of the balance on the loan decreasing over time, it can actually increase for a while.
These home loans generally have an extremely low start rate, such as 1.5%. This low interest rate is usually only effective for a month or so. The rate quickly adjusts to a fully indexed rate significantly higher than the start rate. But the payment stays at the lower rate. The payment options usually offered include the minimum payment, (which is the negatively amortized payment mentioned above); an interest only payment; a thirty year amortized payment; and a fifteen year amortized payment.
With the option ARM to have such a low payment, this is a great loan for someone whose income is highly seasonal, such as the owner of a ski lodge or a tax preparation firm. During the boom times they can pay more because they have more income available. When income is low, there is the option for the lower payment. Some think that this is also a good loan for people who purchase homes in areas with high rates of property value appreciation.
Over time the Option ARM loan adjusts so that one is forced to make payments to pay it off in the 30 year term of the loan. Regardless, throughout the life of the
adjustable rate home loan there is a lot of flexibility relative to the payments made. The trade-off for that flexibility and the low payments is the potential for negative amortization, where the equity is decreasing instead of increasing. If you are interested in this type of product be sure that the short terms benefits of lower payments do not put you in a position which puts you at a disadvantage later.