Option ARM Mortgage Loans: How Do They Work?

Typically, option arm mortgage loans give the consumer four payment options each month - a fixed payment 30 years, a fixed payment 15 years, an interest payment and interest only or deferred payment minimum. Year 30, 15 years and interest only payments are based on the fully indexed rate. The fully indexed rate is calculated by adding the margin to the index. The index would most likely be the Libor, MTA, COSI, COFI, or CODI. Here's an example: Say you have a margin of 3.15 and an index of 3.32. This would give a fully indexed rate of 6.47% (3.15 + 3.32 = 6.47). This is the rate that is used to calculate the year 30, 15 years, and interest payments alone. Depending on the lender and the loan program selected, deferred interest or minimum payment may or may remain fixed between 1% and 2% for 5 years or the payment would start at about 1% and go up or down a maximum of 7.5% per year for 5 years. The minimum 1% to 2% of payment is a payment of interest only and is based on an amortization of 30 or 40 years. The reason is called an option arm loan deferred interest or negative amortization loan is due to the difference between the minimum of 1% payment and interest only payment is added to the loan amount each month if the consumer chooses to pay least. So the balance of the loan increases over time, rather than decreasing. Once the loan hits the mark of 5 years or if the deferred interest reaches 110% or 115% of the original value of the loan, the loan will recast. Which means that they will become a single interest or capital and loan interest rate fully indexed. The fully indexed rate is calculated on a monthly basis and, therefore, could change from month to month. Here are some advantages of the mortgage loan arm option: * L 'minimum payment is 100% interest, therefore, 100% of the payment is tax deductible * The deferred interest is mortgage interest, so that may be tax deductible * If the customer makes bi-weekly payments, the amount of deferred interest will decrease by about 30% or be completely eliminated. * The minimum payment increases the cash flow for the customer * The loan gives the customer several payment options * It also allows customers to use their guides as a financial instrument for building wealth. In conclusion, here are four important points to keep in mind when selecting a program option arm loan: 1) Get a depreciation 30 years (not 40 years). Amortization 30 years will retain the option of paying 1% more available. 2) Choose an index which is less volatile. As the MTA instead of Libor. 3) Select a program option arm that has a 115% recast instead of a 110% recast to increase the chances of payment options are available for the full 5 years. 4) Select an arm option with a low interest rate cap life