The Option ARM is a monthly adjusting mortgage with annual payment caps and a
lifetime interest rate cap. Payments are adjusted annually with the
maximum increase of 7.5% of the previous year's payment amount. As an
example, assuming rising interest rates, a monthly payment of $1,000 could
increase to:
second year - $1,075.00
third year - $1,155.63
fourth year - $1,242.30
fifth year - $1,335.47
Each month you will receive a statement that lets you choose the
payment amount that best suits your current financial needs. Pay the
minimum amount to free up funds for other uses or make larger payments for
faster equity build-up. Your available payment options may
include:
15 year amortization
30 year amortization (40 year term may be selected at application)
Interest only - no amortization
Less than interest only - negative amortization
When rates are falling, fewer options may be offered because the
minimum monthly payment may be already more than needed for normal amortization.
The extra amount is applied to pay off your loan faster than normal.
The loan has a fixed amount (margin) that is
added to an interest rate index each month.
The margin never changes but the index changes throughout the life of the loan.
Why?
Some may ask why anyone would prefer a monthly adjusting mortgage when they
can lock in a fixed rate loan for 30 years. Especially when rates are
historically low, conventional wisdom says that now is the time to secure a
fixed rate. I think it is best to step back and look at the "big picture"
to gain perspective on the issue.
There are two main groups of players in the mortgage market,
lenders and borrowers. Borrowers want to get the lowest rate and lenders
want the highest rate. Each group tries to outsmart the other as the
interest rate game is played out. Lenders are able to employ great
resources to keep themselves fully informed of the factors affecting future
interest rate fluctuations. For lenders, trying to predict future interest
rate trends is a full time job. At any given point in time, the rates
offered on fixed rate loans will be high enough to reasonably insure a
profitable investment for the lender for the expected life of the loan. Of
course you, as a borrower, can win the fixed rate interest rate game but just as
with the casinos and race tracks, the "house" (lenders) win more than they lose.
With an adjustable rate mortgage, the "Fear Factor" of possible
rising rates is removed and instead, a fair market rate is offered.
Protections
To protect you from sharply rising rates and "payment shock", these loans
normally offer the following safeguards. Read the official disclosures
from your lender to be sure.
 |
The index - This is the most important factor.
Loans of this type are normally tied to a slow moving index such as the
12-MTA or COFI |
|
Annual payment caps - each year, the change in minimum
monthly payment cannot exceed 7.5% of the previous year's payment amount.
This is not an interest rate cap, it is based on the payment x .075 ($75
cap on a payment of $1,000 per month). This affects only the minimum
payment due and not the interest rate that is being charged on your loan. |
|
Lifetime interest rate cap - usually expressed as
maximum rate, this protects you from possible future high rates for the life
of the loan. |
|
Five year re-amortization points - Every 5 years, the
7.5% payment cap is temporarily removed so that the loan payment can be reset
to fully amortize your loan over the remaining term. |
The
One Month Option ARM helps you manage your cash flow with up to four different
monthly payment options
