If you are looking to purchase or refinance a property, then you are probably well aware of the fact that you have many options when it comes to mortgage loan programs. Deciding which is right for you can be a real challenge, especially when you consider the complexity of some of the offerings. Option ARMs are possibly the most complex mortgage programs available. However, that shouldn’t stop you from considering what can be an extremely powerful financial tool in your bag of tricks. If you’re open to benefiting from a lesser known mortgage alternative, here’s what you need to know about the Option ARM:
What is an Option ARM?
An adjustable rate mortgages (ARMs) are mortgages in which the mortgage rate adjusts according to a predetermined set of guidelines and calculations that you agree upon at the time of your loan closing. The elements that comprise an ARM include the teaser rate (the interest rate you start out with), the adjustment period (the period of time in which your interest rate is fixed at the teaser rate, before the loan begins to adjust on a monthly basis), the margin (the interest rate percentage that your lender will add to the market index rate once the loan adjusts), and rate caps (limits on how much your rate can adjust). An option ARM is simply an adjustable rate mortgage that provides you with several payment options each month: interest only, 15-year fully amortizing, 30-year fully amortizing, or a specified minimum payment.
The Option ARM has unfairly earned a poor reputation in the finance industry because it enables the possibility of negative amortization. Negative amortization simply means that a property’s equity may decrease over the course of a loan schedule. While this may sound like a bad thing in and of itself, it can be used to leverage your money to your advantage. Basically, the concept of negative amortization is no different from a home equity line of credit (HELOC), and it can benefit you in much the same way.
Is an Option ARM Right for you?
The best candidates for Option ARMs are financially savvy borrowers. It is important that you not only understand the intricacies of the program, but also that you are good with budgeting and managing your own finances. Otherwise, you can be sucked into such a program because of the teaser rate, only to find that you are in way over your head once the rate adjusts. If you know that your income is going to grow, or if your income fluctuates and you must adjust your monthly spending to accommodate those fluctuations, then an Option ARM might be the perfect mortgage loan vehicle for you.
Of course, there is much more to figuring out how well suited an Option ARM is for your needs than can be described in this article. It really depends on what your individual circumstances are. If you are interested in learning more, make an appointment with a loan officer you trust or visit www.mortgages.com for further reading.