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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 different 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.

Many new pay option minimum payment loans can be had with fixed payments for up to 5 years, which means that year after year, the payment will not increase by 7.5%, but will stay the same. So if you have a $500,000.00 loan with a minimum payment option of $1,264.00 and a five year fixed payment period, your payments will stay at $1264.00 for all 5 years.

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


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