What is an Option ARM?
Over the last few weeks, I’ve talked about what a fixed rate mortgage is, what an adjustable rate mortgage is, and how they compare to one another. Today, I would like to discuss a specific mortgage which has gained a lot of media attention over the last few years: the Option ARM.
An Option ARM is, simply, an adjustable rate mortgage which has multiple repayment options. There will generally be a 15 year and 30 year repayment option, to go along with the option of only making minimum monthly payments. If you take advantage of the third payment option, you need to be careful, as it will often be a negative amortizing payment.
Negative amortization is when the payments every month are not enough to pay for the interest which is accruing month to month. In this case, the principal balance will increase, making the total mortgage larger. But it will also mean a lower monthly payment, which can be advantageous to home buyers with non-fixed income sources.
Option ARM’s make a lot of sense for some borrowers, but not so much for others. If you are considering an option ARM, it is important to carefully review the paperwork and have a very serious conversation with your mortgage officer about the specifics of the options.
If you have any questions about Option ARM’s, or if you would like to know how much you can qualify for, please contact me. If you would like to add anything about Option ARM’s, please leave a comment.
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