What Are Option ARMs or Pick-a-Payment Loans?
Option ARMs are adjustable rate mortgages that generally have a relatively high fully amortizing interest rate, but has up to four payment option features for you to choose from each month. You will receive a new invoice each month giving you four payment options. These options are (1) a low payment rate of between 1% – 3.99%, (2) an interest only payment option, (3) a 15 year amortization payment term option, and (4) a 30 year amortization payment term option. These terms options can vary, but these are used most of the time. The first payment option, which most people choose since it is the lowest payment available, has a negative amortization feature. This means that instead of your loan balance going down, it goes up. Here is an example: Mr. Rogers has a pay option ARM loan with a 1% minimum payment. His 30 year feature is at 7.00%. Over the year Mr. Rogers only pays that minimum payment. His balance next year will increase by slightly over 6%, so if his balance was $200,000 at the