Over the past few years the Option Arm mortgage has been a very popular mortgage for those who needed low payments to qualify for a mortgage. However, with declining home values, many homeowners are now seeing the dangers of the Option Arm.
With home prices still out of reach for many or those already in an Option Arm and having problems making their payments, what alternatives are there to the Option Arm for getting a low payment without the risks associated with Option Arms?
Not all option arms have a negative amortization feature. Basically that means that the loan will not turn upside down. There are still payment options that will allow you to choose which payment fits for you each month, but the loan is structure such that you can't end up owing more than you originally borrow.
A common misconception regarding loans with minimum payment options is that they are designed to allow you to make minimum payments for the life of the loan. These are short term loan products, and an excellent choice for the individual who is performing a debt consolidation or home improvement, acquiring an investment property, or as an alternative to paying rent.
Option arms are perfect loans for commissioned or seasonal workers. If you have a tight financial month you can fall back to the minimum payment and pay a little extra when you are at your full earning potential.
Typical Payment Options available each month on an Option ARM mortgage include
1. Minimum Payment Option
2. Interest Only Payment Option
3. 30 (or 40) Year Fully Amortized Payment Option
4. 15 Year Fully Amortized Payment Option
Mortgage loans with "Option ARM" features are ideal for home owners who need the option of making a smaller payment when their cashflow is limited. These Option ARM mortgages are also used by many real estate investors who plan to sell the properties after they have appreciated in value, since a small monthly payment is almost always a better financial strategy for investors whose main concern is to maximize cash inflow and minimize monthly cash outflow.
An option adjustable rate mortgage (ARM) can be a valuable tool because it allows you to have a lower payment. This can provide cash for other needs or allow you to qualify for a larger home.
Longer term mortgages are a newer alternative in the mortgage industry. Many lenders are offering 40 year and even 50 year terms. By taking a longer term rather than the standard 30 year term you can reduce your payments.
These longer term mortgages can also have an interest only option that may lower your payment even further.
Hybrid Option Arms can be employed as well. This gives one the comfort of low monthly payments while having the security of a fixed rate over the term of the loan.
A common issue with option arms is when home prices fall. The homeowner can be stuck owing deferred interest. One option that many homeowners are taking is to refinance into an interest only mortgage. This allows you to catch up on any deferred interest due and at the same time keep a low payment. Fortunately the interest only loan is available for high loan to value loans.
Fixed pay option arms also known as hybrid option arms lock the minumum payment, index, margin and in turn the interest rate for a specific period of time. However, the interest rate on these option arms are slightly higher than their one month adjustable counterparts.