Option ARM Mortgagas Ohio - Cleveland Home Loans

Option ARM Mortgages at Cleveland Ohio Mortgage

Definition – Option ARM mortgages (also known as pick-a-payment mortgages) are home loans that allow you to pick from four different payment methods. These loans are adjustable mortgages that are assigned to an index of your choice depending on the lender. You have an option to make a 1% minimum payment, an interest only payment, a 15-year payment, and a 30-year payment. The interest rate would be the same on all choices except the 1% minimum payment. One thing to note about the minimum payment is that it is a payment that does not even include all the interest for that month, so you will have negative amortization. This means that you are actually adding to the balance of your mortgage by using the 1% minimum payment. The amount you would be adding is the interest only payment minus the minimum payment. (ie. A payment on $500,000 with a 7% initial adjustable rate, you would have the following options for payments: 1% = $1611.38, interest only (7%) = $2916.67, 15 yr (7%) = $4498.36, 30 yr (7%) = $3327.61)

Advantages – You are in control of your payments. You have four different payments to choose form every single month. These loans are primarily used when you live in an area of high appreciation. You would use the 1% payment to afford a nice big home and you would not have to worry about the negative amortization because the value on the house will appreciate so much every year. This is also a very investor friendly loan. The 1% minimum payment creates a better cash-flow for investors. One more place this loan might come in handy is if you are very financially advanced and you have better places to get a return on your money. You would make the 1% minimum payment and put the rest of the money somewhere else creating a higher return on investment.

Disadvantages – The rates on this mortgage are not fixed rates. They move according to whichever index they may be assigned to. The 1% is not even a fixed rate. That 1% may go up or down every year by 7% of the minimum payment. That small amount has a very large calculation behind it. This is a high risk mortgage due to the negative amortization that happens when you choose to make the minimum payment.