Option Arm Mortgage Loans How Do They Work

Option Arm Mortgage Loans How Do They Work

Option Arm Mortgage Loans: How do they work?
Typically,​ option arm mortgage loans give the​ consumer four payment options each month - a​ 30year fixed payment,​ a​ 15 year fixed payment,​ an​ interest only payment and a​ deferred interest or​ minimum payment.
The 30 year,​ 15 year and interest only payments are based on​ the​ fully indexed rate .​
the​ fully indexed rate is​ calculated by adding the​ margin to​ the​ index .​
the​ index would most likely be the​ Libor,​ MTA,​ COSI,​ COFI,​ or​ CODI.
Here’s an​ example:
Let’s say you​ have a​ margin of​ 3.15 and an​ index of​ 3.32 .​
This would give you​ a​ fully indexed rate of​ 6.47% (3.15 + 3.32 = 6.47) .​
This is​ the​ rate that is​ used to​ compute the​ 30 year,​ 15 year,​ and interest only payments .​

Depending on​ the​ lender and loan program you​ select,​ the​ deferred interest or​ minimum payment could either stay fixed between 1% and 2% for 5 years or​ the​ PAYMENT could start at​ around 1% and go up or​ down a​ maximum of​ 7.5% annually for 5 years .​

The minimum 1% to​ 2% payment is​ an​ interest only payment and is​ based on​ a​ 30 or​ 40 year amortization.
The reason an​ option arm loan is​ called a​ deferred interest or​ negative amortization loan is​ because the​ difference between the​ minimum 1% payment and the​ interest only payment is​ added to​ the​ loan amount each month if​ the​ consumer chooses to​ make the​ minimum payment .​
So the​ loan balance increases over time instead of​ decreasing .​

Once the​ loan hits the​ 5 year mark or​ if​ the​ deferred interest reaches 110% or​ 115% of​ the​ original loan amount,​ the​ loan will recast .​
Which means it​ will convert to​ an​ interest only or​ principal and interest loan at​ the​ fully indexed rate.
The fully indexed rate is​ calculated monthly and therefore could change from month to​ month.
Here are a​ few benefits of​ the​ option arm mortgage loan:
* the​ minimum payment is​ 100% interest; therefore,​ 100% of​ the​ payment is​ tax deductible
* the​ deferred interest is​ mortgage interest so it​ may be tax deductible
* If the​ client makes bi-weekly payments,​ the​ amount of​ deferred interest will decrease by approximately 30% or​ be completely eliminated.
* the​ minimum payment increases the​ client’s cash flow
* This loan gives the​ client several payment options
* It also allows clients to​ use their mortgage as​ a​ financial tool to​ build wealth .​

In closing,​ here are four important points to​ keep in​ mind when selecting an​ option arm loan program:
1) Get a​ 30 year amortization (not 40 years) .​
the​ 30 year amortization will keep the​ 1% payment option available longer.
2) Choose an​ index which is​ less volatile .​
Like the​ MTA instead of​ the​ Libor.
3) Select an​ option arm program that has a​ 115% recast instead of​ a​ 110% recast to​ increase the​ chances of​ the​ payment options being available for the​ full 5 years.
4) Select an​ option arm with a​ low lifetime interest rate cap
For more information on​ this and other mortgage related topics,​ please visit:
Please feel free to​ reprint this article as​ long as​ the​ resource box is​ left intact and all links are hyperlinked.

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