What is a Pay option ARM - A Pay Option ARM is an adjustable rate mortgage that gives the borrower the option of selecting how much to pay each month based on different loan options. The borrower can choose any one of the differnet options included in their loan program.Pay Option Adjustable Rate Mortgages are being offered by more and more banks. It is designed for home owners whose incomes are commission based, which can vary from month to month, and for those who have seasonal jobs, such as fishermen and vacation resorts, whose annual incomes are usually earned in 6 months.
Pay Option ARMS have been around for many years but until the past four or five years have been primarily used by investors. The rising cost of homes and the lack of cash flow in the average American household have made these loans very popular with owner occupied homes recently.
The different options available for payments each month are a minimum payment, an interest only payment, a 30 year amortized payment and a 15 year amortized payment
Option arms or the pick your payment loan can adapt to fit your lifestyle. They offer flexible payment options and qualification standards. Investors like them for there low payments and cash flow potential.
Traditional home loan payments are the same each month for the term of the loan. With an Option ARM, you can choose from one of four payment choices each month -- which gives you the flexibility to change your mortgage payment as your needs change. You are only required to make the minimum payment on the loan each month.
Payment Options
1. Minimum Payment
2. Interest Only Payment
3. Fully Amortized 30 year payment
4. 15 Year Payment
Main Benefits of an Option Arm
To minimize your house payment to pay off other debt.
To control how much tax-deductible interest you pay monthly.
To maximize your buying power.
If your income tends to fluctuate.
How an Option Arm Works
The minimum payment can only increase or decrease by 7.5% per year. There would be an adjustment to your payment is rates have moved up or down. After 5-years an option arm will recasts which ensure your loan will be repaid within the given term or 30 years. This means your new payment would be calculated to pay the loan off in 25 years.
Since the minimum payment is so low you may not be paying off all of the interest each month. This is called deferred interest and will be added to your principal balance. Deferred interest can be tax deductible when you refinance or sell your home.
A lifetime interest rate cap limits how high your interest rate can reach.
A Pay Option ARM may be a good choice for the self-employed or for people with erratic monthly cash flow.
The minimum pay option is the lowest possible payment and lets you keep more cash in your pocket each month. This payment typically changes annually and is recalculated based on the remaining principal balance of the loan, the remaining loan term, and the current interest rate. A payment cap is usually applied to ensure that they payment does not swing wildly from year to year. A typical payment cap is 7%. For example, if your minimum payment was $1,000 in year one, the most it would be in year two is $1,070 and the least it would be is $930.
The lower payments offered with a Pay Option ARM can be used to free up cash flow for use in other investments, such as starting your own business.
The pay option ARM is a very effective tool for someone that is interested in investing in multiple properties. With this loan a savvy individual has the opportunity to own two houses and keep his mortgage payments very close to what their payment is with just one Principal and Interest loan
Should i refinance into a Pay Option ARM - Pay option ARMS are not for every borrower but there are a few borrowers that can benefit from the Pay Option ARM mortgage programs available today.
Self-Employed and Commissioned workers- With the flexible options in the Pay option programs these borrowers can adjust their monthly payments according to their monthly earnings.
Borrower’s with high consumer debt– By lowering their mortgage payment these borrowers are able to pay of higher interest debt faster.
When considering whether to refinance into a Pay Option ARM, always keep in mind that Pay Option ARM can create negative amortization. Negative amortization occurs when a home owner makes the minimum monthly payments, which are less than the interests incurred, and ends up owing more than what the homeowner owed originally. Most Pay Option ARM programs re-adjust the payments every year so that the loan balance would not be too much more than the original loan amount.
Ask your mortgage broker to review your situation and see if you could benefit from the pay option ARM programs. If a pay option ARM is not for you there may be better programs based on your situation.
Option Arms are a good choice for:
-Increased cash flow on investment properties
-Areas with high appreciation
-Lower payments in order to invest and payoff debt
-People who have unpredictable incomes.
Some Option ARM's specifically have SOFT pre-payment options. This gives you the flexibility of selling your home without paying the pre-payment penalty or refinancing with the same lender to have your pre-payment penalty waived. This gives you the flexibility of the Option ARM without being stuck while the market drastically changes on you.
Pay Option ARM's are generally not meant to be programs that one stays with for long periods of time, such as 10 years or more. Pay Option ARM's can incur negative amortization which means instead of your mortgage balance going down it actually increases. Most Pay Option ARM's have a cap that will not allow the balance of your loan to increase higher than 115% of the appraised value of your home. Most also have a rate cap that states the rate can't increase any higher than 9.95%. These numbers may vary slightly so check with your mortgage broker on the exact details of your loan program.
Before deciding on an Option ARM first determine why you are considering a refinance. Are you refinancing to save money each month? Would you like to get some cash out? Do you live in a rapidly appreciating area?
The Pay Option ARM gives you 4 "options" to make your payment.
(1) The minimum payment.
(2) Interest only payment.
(3) 30 year fully amortizing payment.
(4) 15 year fully amortizing payment
If the house you are living in is not your last house or it is a stepping stone towards a bigger purchase down the road then a payment option arm may be a good fit for you. You save additional money each month with flexible payment options and in turn your house takes on the financial burden. So if you plan to sell your place in the next few years the payment option arm should be an option to consider.
The pay option arm is also a great tool for seasonal workers. If you are a painter, and know that the majority of your income comes from the summer months, then you could adjust your payments to those months. You would be able to pay more on your mortgage while you are making more money, and pay less during the months that are typically slower for you. This would leave more cash in your hands during those slow months.
A Pay Option ARM is also a great tool for property investors. It gives you flexible payments that can help in months when the property is vacant, or in the event repairs are needed it can be used to offset the cost of repairs rather than using cash out of pocket.
Avoid Payment Option Arms with high margins and three year pre-payment penalties. On most Option Arms the rate changes monthly according to a specific index and is determined by adding the margin to the index. The higher the margin the higher your rate will be. If the loan contains a pre-payment penalty and you want to refinance to avoid an increasingly higher rate, it will cost you thousands of dollars.
If your household, like many in the US today, seems never to have enough cash every month and you find yourself constantly turning to credit cards or other expensive debt, this loan may be quite helpful. The Pay Option ARM can free up needed cash every month and help you avoid the other, more expensive kind of debt.
The Pay Option ARM is also a great way to pay down credit card debt, without laying out additional cash on a monthly basis. This method of managing your mortgage provides interest savings as well as it will usually provide some sizeable Taxes savings.
