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Should I refinance into a Pay Option ARM Mortgage Loan?

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.


Taking cash out through an Option ARM mortgage is a great way to separate cash from equity to start a business, make an investment or otherwise improve your quality of life. They are a powerful financial tool in the right hands, and when used responsibly can dramatically improve your lifestyle.

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.

Make sure that you have your mortgage professional clearly lay out the terms of your particular loan program. Pay particular attention to your fully indexed rate and to any pre-payment penalty that is attached to the loan.

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.


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