|Mortgage & Refinancing Information|
What is the PayOption ARM?
Imagine an adjustable rate mortgage that allows you to pick one of four payment options on your monthly mortgage bill. It is an ARM on which the interest rate adjusts monthly and the payment adjusts annually, with borrowers offered options on how large a payment they will make. The options include interest-only, and a "minimum" payment that may be less than the interest-only payment. The minimum payment option results in a growing loan balance, termed "negative amortization".
How Will I Know an Option ARM When I See One?
Ask the loan officer if the mortgage has more than oe payment option. Does the rate adjusts monthly, and if negative amortization is allowed. If the answer to both questions is "yes", you almost certainly have an Option ARM. Their names are all over the map and include "1 Month Option Arm", "12 MTA Pay Option ARM," "Pick a Payment Loan", "1-Month MTA", "Cash Flow Option Loan", and "Pay Option ARM".
What Are the Advantages of an Option ARM?
Their main selling point is the low minimum payment in year 1. It is calculated at the interest rate in month 1, which can be as low as 1%, and it rises by only 7.5 % a year for some years. The low initial payment allows borrowers to buy a more expensive home than they would be able to afford. Other reasons are to use the monthly payment savings for other purposes, like: paying down the principle, and amortizing credit card debt. Be aware that they seldom explain the risks.
What's Are the Risks of an Option ARM?
For those electing the minimum payment option, the major risk is "payment shock" - a sudden and sharp increase in the payment for which they are not prepared. The rule that the minimum payment can rise by no more than 7.5% a year has two exceptions. The first is that every 5 or 10 years the payment must be "recast" to become fully-amortizing. It is raised to the amount that will pay off the loan within the remaining term at the then current interest rate - regardless of how large an increase in payment is required.The second exception is that the loan balance cannot exceed a negative amortization maximum, which can range from 110% to 125% of the original loan balance. If the balance hits the negative amortization maximum, which can happen before 5 years have elapsed if interest rates have gone up, the payment is immediately raised to the fully amortizing level.Either the recast provision or the negative amortization cap can result in serious payment shock. That is why I tell my clients that unless you have a financial plan for paying the minimum payment, always pay the Interest Only Option or higher.
How Do I Protect Myself Against The Risks?
First of all, if you can't maintain financial discipline do not engage in this type of loan. You will be tempted to pay the minimum payment from day one. When it recasts, you will be stuck between a rock and a hard place. If you have sound financial principles, and can adhere to them, go for it.
Make sure your loan officer discloses the margin. The lower the margin, the lower your cost and your vulnerability to payment shock. You can also minimize the risk by taking the highest initial payment you can afford. The higher your initial payment, the smaller the potential payment shock down the road.
Terell Jones, Sr. Loan Officer, Group Manager
Terell Jones has been a successful mortgage professional for several years. He leads a team of loan officers with 1st American Mortgage, Inc. in McLean, Virginia.
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A Home equity line of credit is a loan which is similar to a credit card. These often have a very low interest rate (In most cases even lower than home equity loans).
Reverse Mortgage - Be Sure You Need It Before Applying For One
Reverse mortgages used to be considered the last resort of desperate retirees who needed to borrow against their home equity in order to pay for medical expenses. With home prices across the country rising at astonishing rates, more and more retirees, aged 62 and over, are taking out reverse mortgages to fund better retirement living.
Mortgage Sales Hit Problems
The housing market has been buoyant over the past few years, but mortgage providers and first-time buyers are both now facing a tough time. Following announcements from the Bank of England that there has been an overall decline in the total number of UK home-buyers, and a declaration from the Financial Ombudsman Service (FOS) that the number of disputes concerning mis-sold mortgage endowments has now hit record levels, it seems that mortgage lenders are facing a bleak time.
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Your search for a mortgage isn't leading results.Check for any impediments.
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The decision to buy a home in Florida can be one of the best you will ever make. If you own a home in Florida you may be considering refinancing.
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Buying a Home for the first time can be a little "nerve racking". Mortgage terminology that brokers use everyday can leave you scratching your head or shaking your head pretending that you know what they're talking about.
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Find the Best Mortgage Company
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Are you considering applying for direct homeowner loans? Perhaps you're simply wanting more information on direct homeowner loans so that you'll be able to make an informed decision?Direct homeowner loans can be very useful for a wide variety of purposes ranging from purchasing new vehicles to consolidating old debts, but as with all loans should be researched and carefully considered before any final decisions are made.How direct homeowner loans workDirect homeowner loans are based upon the equity that you have in your home? equity, of course, being the percentage of your home's value that is free from any mortgage or loan.
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What Is The Best Deal For A Mortgage?
Few of us invest the time and effort into researching and securing the best deal for a mortgage to purchase our home.For most of us, our house is the single most important and expensive purchase we ever make!We invest a lot of time and effort into finding the perfect property in the best location and with as many of the features from our wish list as possible, yet, when it comes to finding the best deal for a mortgage, we take what is offered rather than researching and securing the best mortgage for our situation.
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