Option Arm Mortgage Loans How Do They Work

Option Arm Mortgage Loans: How do they work?
Typically,​ option arm mortgage loans give the​ consumer four payment options each month - a​ 30year fixed payment,​ a​ 15 year fixed payment,​ an​ interest only payment and a​ deferred interest or​ minimum payment.
The 30 year,​ 15 year 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:
Let’s say you​ have a​ margin of​ 3.15 and an​ index of​ 3.32 .​
This would give you​ a​ fully indexed rate of​ 6.47% (3.15 + 3.32 = 6.47) .​
This is​ the​ rate that is​ used to​ compute the​ 30 year,​ 15 year,​ and interest only payments .​

Depending on​ the​ lender and loan program you​ select,​ the​ deferred interest or​ minimum payment could either stay fixed between 1% and 2% for 5 years or​ the​ PAYMENT could start at​ around 1% and go up or​ down a​ maximum of​ 7.5% annually for 5 years .​

The minimum 1% to​ 2% payment is​ an​ interest only payment and is​ based on​ a​ 30 or​ 40 year amortization.
The reason an​ option arm loan is​ called a​ deferred interest or​ negative amortization loan is​ because the​ difference between the​ minimum 1% payment and the​ interest only payment is​ added to​ the​ loan amount each month if​ the​ consumer chooses to​ make the​ minimum payment .​
So the​ loan balance increases over time instead of​ decreasing .​

Once the​ loan hits the​ 5 year mark or​ if​ the​ deferred interest reaches 110% or​ 115% of​ the​ original loan amount,​ the​ loan will recast .​
Which means it​ will convert to​ an​ interest only or​ principal and interest loan at​ the​ fully indexed rate.
The fully indexed rate is​ calculated monthly and therefore could change from month to​ month.
Here are a​ few benefits of​ the​ option arm mortgage loan:
* the​ minimum payment is​ 100% interest; therefore,​ 100% of​ the​ payment is​ tax deductible
* the​ deferred interest is​ mortgage interest so it​ may be tax deductible
* If the​ client makes bi-weekly payments,​ the​ amount of​ deferred interest will decrease by approximately 30% or​ be completely eliminated.
* the​ minimum payment increases the​ client’s cash flow
* This loan gives the​ client several payment options
* It also allows clients to​ use their mortgage as​ a​ financial tool to​ build wealth .​

In closing,​ here are four important points to​ keep in​ mind when selecting an​ option arm loan program:
1) Get a​ 30 year amortization (not 40 years) .​
the​ 30 year amortization will keep the​ 1% payment option available longer.
2) Choose an​ index which is​ less volatile .​
Like the​ MTA instead of​ the​ Libor.
3) Select an​ option arm program that has a​ 115% recast instead of​ a​ 110% recast to​ increase the​ chances of​ the​ payment options being available for the​ full 5 years.
4) Select an​ option arm with a​ low lifetime interest rate cap
For more information on​ this and other mortgage related topics,​ please visit:
Please feel free to​ reprint this article as​ long as​ the​ resource box is​ left intact and all links are hyperlinked.
Option Arm Mortgage Loans How Do They Work Option Arm Mortgage Loans How Do They Work Reviewed by Henda Yesti on June 25, 2018 Rating: 5

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