Option Arm Mortgage Loans How do they work
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Option ARM Mortgage Loans: How Do They Work?
Summary:
Discover how to effectively set up a Pay Option ARM mortgage loan for maximum benefits.
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Understanding Option ARM Mortgage Loans
Option ARM mortgage loans offer borrowers a unique set of four monthly payment choices: a 30-year fixed payment, a 15-year fixed payment, an interest-only payment, and a deferred interest or minimum payment.
These options are based on the fully indexed rate, calculated by adding the margin to the index. Common indices include LIBOR, MTA, COSI, COFI, or CODI.
Example Calculation:
Imagine you have a margin of 3.15 and an index of 3.32. This results in a fully indexed rate of 6.47% (3.15 + 3.32 = 6.47). This rate is used to calculate the 30-year, 15-year, and interest-only payments.
Depending on your lender and loan program, the deferred interest or minimum payment can either remain fixed between 1% and 2% for five years or start around 1% and fluctuate by a maximum of 7.5% annually over five years.
Understanding Minimum Payments and Deferred Interest:
The minimum payment is essentially an interest-only payment based on a 30 or 40-year amortization. An Option ARM is also known as a deferred interest or negative amortization loan because the difference between the minimum 1% payment and the interest-only payment is added to the loan balance each month if the minimum payment is chosen. This causes the loan balance to increase over time.
Once the loan reaches the five-year mark or if the deferred interest hits 110% or 115% of the original loan amount, the loan will recast, converting to an interest-only or principal and interest loan at the fully indexed rate.
Benefits of Option ARM Loans:
- The minimum payment is 100% interest, making it fully tax-deductible.
- Deferred interest may also be tax-deductible.
- Making bi-weekly payments can reduce deferred interest by about 30% or eliminate it entirely.
- Increases cash flow with a lower minimum payment.
- Provides multiple payment options, allowing the use of a mortgage as a financial tool to build wealth.
Key Considerations:
1. Amortization: Opt for a 30-year amortization instead of 40 years to retain the 1% payment option longer.
2. Index Selection: Choose a less volatile index like MTA instead of LIBOR.
3. Recast Options: Look for a program with a 115% recast instead of 110% to ensure payment options remain for the full term.
4. Rate Cap: Select an option with a low lifetime interest rate cap.
For more insights on mortgage topics, visit [Mortgage-Training.Mortgage-Leads-Generator.com](http://Mortgage-Training.Mortgage-Leads-Generator.com).
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