Most mortgages have monthly payments that stay the same. But what if you don't get paid every week? Would you like to be able to make changes to your mortgage payment based on how much money you have coming in? You can do this with an option ARM, which is also called a flex-ARM or a "pick-a-payment" loan.
How does it work?
A choice ARM is a type of mortgage with a different twist. Each month, you don't pay the same amount. Instead, the lender sends a statement every month that shows up to four ways to pay. You just pick the amount you want to pay for the month and send in your payment.
There are different choices, but this is the most common menu:
The "initial" interest rate can start as low as 1.25 percent. This is used to figure out the minimum payment. Because this payment is so small, it can help you get by in months when you don't have much cash, like when you're waiting for a commission or bonus check. But any interest you don't pay gets added to the loan's principal, so your principal grows.
Interest only: You pay all of the interest due, but none of the principal. This doesn't reduce the amount you owe on your mortgage, but it keeps you from having to pay interest.
30-year amortised: This is the same as the monthly payment for a mortgage that is paid off over 30 years at the interest rate you currently have. It has both the original loan amount and the interest.
The same as above, but the cost is spread out over 15 years. This is the most you have to pay each month. If you choose it, you can pay down your principal faster than with any other choice.
The small type
The biggest problem with option ARMs is that the initial rates are only good for a short time. The low minimum payments that make these mortgages so appealing can go up a lot. Also, the loan is recast every five years, which means a new amortisation schedule is made to make sure the remaining balance is paid off by the end of the loan's term. If that happens, the minimum payment could go up even more.
Also, putting off too much interest can lead to something called "negative amortisation." If your balance grows to be 10% to 25% more than the original principal (depending on state law), your loan is automatically recast and you have to start paying the fully amortised rate, which means your monthly payments will go up.
Option ARMs could also be bad because they are harder to understand than most other mortgages. Buyers may be tempted to buy a home without fully understanding how much the minimum payments will go up over time. When the amount they have to pay each month goes up, these people may feel "payment shock."
To learn more about flexible payment mortgages, visit http://www.lendingtree.com/cec/yourhome/yourmortgage/open-arms.asp
