Adjustable Rate Mortgages (ARM) is the most popular type of mortgage on the market encompassing 63% of all residential mortgages in California. The ARM of choice for many borrowers is the Option ARM. The Option ARM allows the borrow to obtain a low monthly start payment rate, some as low as 1%, but the actual rate charged is a higher adjustable rate. The “Option” in the ARM is four payments to choose from every month: The principal and interest on the minimal start rate; the interest only at the actual rate; principle and interest based on a 30 year term; and principal and interest based on a 15 year term.
The Good is an Option ARM allows flexibility in payment for people with fluctuating income. A buyer can obtain a home or an investment property for low initial payments; if property values are rising this can be sound investment.
The Bad is the minimum payment rises by 7.5% per year. For example if your 1st year minimum payment is $1,000.00 the second year minimum payment will be $1,075.00. This increase is factored in every year until the minimum payment is phased out. The interest not paid on the actual rate is deferred into the loan balance.
The Ugly is the loan needs to be paid off within the 30-year term. To facilitate this, the lender will recast the loan, usually at Five years or when the loan balance reaches 110-115% of the original loan (this could happen 3-4 years into the loan). The payments could jump 50% or more.
The Solution is a unique loan package we offer.
- The start rate varies. Right now it is at 1.5%. This still provides a significant low start rate, but defers less accumulated interest onto the balance of the loan.
- The loan recast after 10 years or 125% providing plenty of time for the property to appreciate and allowing the start rate to phase out slowly naturally before a forced recast of the loan.
- This loan has a bi-weekly payment option with a true 14 day amortization cycle and no monthly fee. This option will allow minimum payments and make it possible to pay off the loan in 25 years.
- The loan has a fixed rate option
We have a number of Option Arm Products, including 1% loans. The above loan is a good choice for someone wanting the advantages of the Option ARM with the security of a steady payment with the goal of paying off the loan.