<
Go Back
What is the PayOption ARM Mortgage?
Mortgage Tips
by Lisa Epstein
The PayOption ARM is a “deferred interest option” mortgage that allows a borrower to finance their home and optimize cash flow at the same time. Unlike fixed rate products, the PayOption ARM gives the borrower up to 4 payment options to select from when making their monthly mortgage payments. With the PayOption ARM, you can defer interest at any given month when making a payment that is less than the Interest Only Payment. When interest is deferred, the amount of the unpaid interest is added to the principal balance. The four options are:
▪ Minimum Payment: based on the introductory rate and represents the least amount of money accepted at any given time.
▪ Interest Only Payment: based on the fully indexed rate and the current balance (available when greater than the minimum payment)
▪ 30-year amortized Payment: based on the fully indexed rate and the current balance (available when greater than the minimum payment)
▪ 15-year amortized Payment: based on the fully indexed rate and the current balance (available when greater than the minimum payment)
Some additional information to keep in mind:
• You are required to make at least the minimum payment.
• The minimum payment changes annually and is subject to a 7.5% cap per year until recast.
• The fully indexed rate is the index plus the margin (the two indices usually used are the MTA and the COFI).
• The MTA index (3.618 as of the day this article was written) is currently higher but the margins are generally lower than the COFI. The COFI index (3.296 as of the day this article was written) has historically been a bit more stable than the MTA, but the margins are usually about three-quarters to a point higher.
• The other payments are based on the fully indexed rate and may change monthly, depending on the fluctuations of the index.
• Unless specified specifically by the borrower, any extra payments will first pay down the deferred interest, then principal.
• The loan automatically recasts every five years and when the balance of the loan reaches 110% or 115% of the original note amount.
• When the loan recasts after 60 months, the new minimum payment is based on the fully indexed rate at that time. This cycle continues every five years or when the balance of the loan reaches 110% or 115% of the original note amount.
|
