Flexible Payment Mortgages

Flexible Payment Mortgages



Flexible Payment Mortgages
With most mortgages,​ your payment is​ the​ same every month .​
But what if​ your paycheck isn’t so regular? Would you​ like to​ be able to​ vary your mortgage payment depending on​ your cash flow? An option ARM -- also called a​ flex-ARM or​ pick-a-payment loan -- allows you​ to​ do just that.
How does it​ work?
An option ARM is​ an​ adjustable-rate mortgage with a​ twist .​
You don’t pay a​ set amount each month .​
Instead,​ the​ lender sends a​ monthly statement with up to​ four payment options .​
You simply choose the​ amount you​ want to​ pay that month and then submit your payment.
The options vary,​ but here’s the​ most common menu:
Minimum payment: This is​ calculated using an​ initial interest rate that can start as​ low as​ 1.25 percent .​
Because this payment is​ so low,​ it’s useful for months when you​ don’t have much cash on​ hand,​ perhaps because you​ are waiting for a​ commission or​ bonus check .​
But any unpaid interest gets deferred,​ or​ added to​ the​ principal of​ the​ loan,​ so your principal grows.
Interest only: you​ pay all the​ interest due,​ but none of​ the​ principal .​
This doesn’t reduce your mortgage balance,​ but it​ allows you​ to​ avoid deferring interest .​
30-year amortized: This matches the​ monthly payment of​ a​ mortgage amortized over 30 years at​ your current interest rate .​
It includes both principal and interest.
15-year amortized: the​ same as​ above,​ but amortized over 15 years .​
This is​ the​ highest monthly payment .​
Choosing it​ allows you​ to​ reduce your principal faster than any other option.
The fine print
The biggest caveat with option ARMs is​ that those enticing initial rates are short-lived .​
The low minimum payments that make these mortgages so attractive can increase dramatically .​
In addition,​ every five years,​ the​ loan is​ recast -- that is,​ a​ new amortization schedule is​ drawn up to​ ensure that the​ remaining balance will be paid off by the​ end of​ the​ loan’s term .​
When that happens,​ the​ minimum payment can be pushed even higher.
What’s more,​ if​ you​ defer too much interest,​ you​ can reach what’s called negative amortization .​
If your balance grows to​ 10 percent to​ 25 percent (depending on​ state law) greater than the​ original principal,​ your loan is​ automatically recast and you​ have to​ start paying the​ fully amortized rate,​ which will increase your monthly payments.
Another potential downside of​ option ARMs is​ that they’re more complicated than most other mortgages .​
Home buyers may be seduced without fully understanding how much the​ minimum payments will increase over the​ long-term .​
When the​ monthly amounts go up,​ these people can experience payment shock.
To learn more about flexible payment mortgages,​ visit www.lendingtree.com/cec/yourhome/yourmortgage/open-arms.asp




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