Pros and Cons Of An Pay Option Arm

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Pros and Cons Of An Pay Option Arm
If you are considering an option arm there are many things that you should be aware of. Like any other type of loan it is very important to completely understand how the loan works, and what that will mean to you in the long run.

The ability to make minimum payments is not limited to Adjustable Rate Mortgage products, there are fixed rate loans with minimum payment options which allow substantially lower minimum payments than conventional mortgages without sacrificing any of the stability or predictability of the classic 30 year fixed.

One con of the the pay option arm is that if you make the minimum payment option each and every month, you will most likely incur negative amortization. Negative amortization is when your loan balance actually increases instead of decreases. Negative amortization occurs because the minimum payment that is required is not high enough to cover the interest portion of the payment. Therefore, please understand how the Pay Option ARM works and that your mortgage loan balance can actually go up instead of down which can eat away at the equity you have available in your home.

Because of its flexibility, the Pay Option ARM it can be catered to meet the needs of many borrowers.

People with fluctuating incomes can benefit from the Option Arm because it allows more payment options each month.

The pay option arm can be very useful for savvy investors. The low minimum required payment means increased cash flow can be used for other investments. And because some pay option arms have introductory fixed rates for up to 5 years, an investor can determine how much the additional leverage of deferred interest will cost in the long run.

Payment option arms offer up to four different payment options each month that gives you the ability to choose the payment that best fits your financial needs that month;
- The minumum payment
- Interest Only Payment
- Fully amortized payment (30 or 40 year term)
- Fully amortized 15 year payment.

To fully utilize the benefits of a pay option ARM it takes a lot of control and common sense. The last thing that you want to do is take the money you save by making the minimum payments and buy a depreciating asset such as a car or boat!


  • Good investment tool (more positive cash flow for investors)
  • Borrower can put extra savings into IRA or 401K plan that can outpace the negative amortization
  • Allows you to afford more house than you would normally qualify for
  • Takes advantage of high appreciation rates in certain areas


  • Negative Amortization can lead to a higher mortgage balance than you started with
  • Not a good loan for irresponsible borrowers
  • Allows you to afford more house than you would normally qualify for
  • Many lenders will not give you a 2nd mortgage behind the negative amortization 1st, so if you're planning on getting a 2nd in the near future, your options will be limited

The pay option arm could be a great way of obtaining property you only wish to hold on to for a short period of time. However, be aware that the longer you pay the minimum payment only, the more you could owe in the future.

A pay option adjustable rate mortgage (ARM) allows you flexibility of payments. You can pay less than the interest accrued on the loan. The lower payment can provide cash flow for other investments. The interest must still be repaid and eventually your payment will increase.


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 Information listed above is to be used for educational purposes only and is not guaranteed

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