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What to Compare When Choosing and Option ARM

Although there are multiple things to consider when comparing option ARMs here are few of the basics.

Loan term
Initial interest rate - or start rate.
Initial interest rate period - or commonly referred to as introductory period. For example with a 1 month option ARM the initial interest rate is for the first month only.
Periodic adjustment – how often the interest rate will increase.

Different Option ARM programs also come with different pre-pay penalty structures. Be sure to know what your pre pay period will be, if any, and what options you have regarding a pre payment penalty.

Customers should be clearly aware of the negative amortization that is a part of may pay option arm loans. for example, if the fully indexed payment of principle and interest would be $1,500, and the minimum payment is $500, and if the customer choses to pay less than the fully indexed amount, than the difference between the amount they pay and the fully indexed rate is ADDED to the balance of their mortgage. So if this customer had a $225,000 balance on their loan, payed $1,000 on their payment. Since the difference between that payment and the fully indexed amount of $1,500 is $500, then rather than paying off the balance of their mortgage, they would add $500 to is, ending the month with an increased balance of $225,500.

A nice feature of the Option Arm is the ability to make a minimum payment, an interest only payment or a fully indexed payment.

Most loans with minimum payment options offer a very low minimum payment amount, which may increase by up to 7.5% each year. Very often this amount is less than half of what a normal mortgage would cost for the same amount. While there are risks associated with any loan product, nothing offers the ability to control an asset or reside in a property less money than a minimum payment option loan. While older "Option ARM" mortgages may only offer this ability for 3 to 5 years, borrowers interested in mainataining these low payment levels over 5, 10, or even 30 years should enquire about fixed rate minimum payment loans.

When getting into an option arm program take a close look at the index. When rates are rising its better to get into an option arm that has its index tied to the COSI, COFI or even the MTA. When rates are going down it may be better to use the LIBOR because it is a index of what is currently going on in the market.

Many investors favor longer introductory rate periods. The idea behind a 5 year fixed introductory period is that property appreciation should negate any deferred interest, meaning less cash out of pocket and more money for other investments. Any loan with the potential for deferred interest should be approached carefully and discussed throughly with your preferred mortgage professional.

While in other mortgages borrowers are generally shopping for the bse rate with the least points, option arms are a little more complicated. You should examine the index and margin. The index is the variable portion of the rate, do some research about the various indexes to determine which will be fit your lifestyle best. The margin is the fixed portion. As with anything make sure when shopping you compare apples to apples, compare margins on the same index, etc.

Different lenders will follow different indices. Some follow the MTA and some even have there own indices such as the COSI or CODI.

When comparing option arms make sure to compare the lender fees. Often times lenders have the same programs but the fees can be different.

The margin, index & closing costs will all reflect into the APR but an Option ARM is more difficult because you must find everything that you are looking for. Such as how much will your payments increase each year and what is the payment rate (1%, 1.5%...).
After a thourough interview we can then place you in the proper loan program.


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