Choosing An Option Arm Thats Right For You
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(If you need to know anything about mortgages, the most helpful thing to get started would be to understand the difference between fixed-rate mortgages and adjustable-rate mortgages or ARMs. )
The names themselves are pretty self explanatory. Fixed-rate mortgages give the borrower a fixed interest rate for the entire life of the loan, while ARMs usually give a fixed rate for a certain amount of time and then adjust to the current market’s standards. There are benefits and drawbacks to both of these types of loans, so you should research different mortgage products thoroughly before making any decisions.
ARMS are a bit more confusing since they are subject to change and there are a variety of different kinds of these types of loans. If you know that you want to get into an ARM, the next step would be to choose with type is right for you. One of the most popular type of ARM, is the Option ARM, which gives the borrower a variety of different payment options, which makes it very convenient.
A September 8, 2006 article from Quicken Loans, “Choosing the right Option ARM,” discusses the differences between the most popular products for this mortgage genre.
“One loan that provides a lot of flexibility is called an option ARM (ARM stands for adjustable rate mortgage), also referred to as a pay option ARM or a flexible payment ARM. There are several types out there and if you're considering an option ARM, it's important to choose the right one or you can get yourself into trouble.”
“Option ARMs are a type of adjustable rate mortgage (ARM) and allow you to choose between four payment options each month, whichever best fits your needs. You can choose from a minimum payment, an interest-only payment, a 30-year or a 15-year amortization payment.”
Although these types of loans can be a great option for a variety of people, they are definitely not for everyone. They may be a good idea for you if you fit into one of the cases listed below:
“These payment choices can be good for people who are going through a major life change such as divorce or those whose income is not fixed, such as salespeople or wait staff. If you have a month where you don't make as much money and have trouble paying your bills for that month, you could choose to make the minimum payment or the interest-only payment. Then, when things pick up, you can afford to make the 15- or 30-year payment. It can also be a good type of loan if you're a serious investor and want to put more money toward a particular investment when you choose.”
Choosing the interest only option means that by paying your monthly payment each month you are only covering the interest.
“If you decide to make the 15-year or 30-year amortization payment, you're paying an amount that is needed to pay off your loan in 15 or 30 years (respectively) from the date you closed your loan. The 15-year payment is the higher of the two and it pays down your loan's principal balance the fastest.”
The minimum payment option is the most difficult to understand but essentially means that you are paying an amount that is less than what would be required to cover the full interest.
“An option ARM can give you the benefit of a lower rate because it's an adjustable rate mortgage. The introductory rates for this type of loan program can be as low as one percent. Plus, you also have the ability to choose which type of payment you want to make, depending on your financial situation for a given month. The minimum payment can significantly help you if you need more cash for other things, like consolidating high-interest credit card bills or investing more in your 401k. The 15-year payment can help you pay off your loan faster, if that's your goal.”
