Flexible Payment Mortgages
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
Flexible Payment Mortgages
Understanding Flexible Payment Mortgages
Most mortgages require a fixed monthly payment, but what if your paycheck fluctuates? Would you like the flexibility to adjust your mortgage payments based on your cash flow? An Option ARM, also known as a flex-ARM or pick-a-payment loan, offers this freedom.
How Does It Work?
An Option ARM is an adjustable-rate mortgage with a unique feature: variable payment options. Each month, your lender provides a statement with up to four payment choices. You select the amount that suits your financial situation for that month.
Common Payment Options
1. Minimum Payment: Calculated using a low initial interest rate, sometimes starting at 1.25%. While this option helps when cash is tight, unpaid interest is added to the principal, increasing your overall loan balance.
2. Interest Only: Covers all interest due without reducing the principal. This option prevents deferred interest but doesn't decrease your mortgage balance.
3. 30-Year Amortized: This option reflects a 30-year amortization schedule, covering both principal and interest, based on your current rate.
4. 15-Year Amortized: Similar to the 30-year option but accelerated over 15 years. It requires the highest monthly payment, helping you reduce your principal faster.
Important Considerations
While initial rates might be appealing, they are short-lived. The low minimum payments can rise significantly over time. Additionally, every five years, the loan undergoes a "recast," meaning a new amortization schedule is created to ensure the loan term is met. This process can further increase minimum payments.
Excessive deferral of interest leads to negative amortization. If your loan balance grows significantly?"typically 10% to 25% above the original principal?"your loan is automatically recast, increasing your monthly payments to cover the fully amortized rate.
Option ARMs can be more complex than standard mortgages. Many buyers are attracted by low initial payments without fully realizing the long-term implications. As payments rise, the resulting "payment shock" can be a financial strain.
For more information on flexible payment mortgages, visit [LendingTree](http://www.lendingtree.com/cec/yourhome/yourmortgage/open-arms.asp).
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