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PAY OPTION ARMS
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Control Your Mortgage... Don't Let Your Mortgage Control You!
Due to rapid rising home values in recent years, the Pay Option ARM loan product has become one of the fastest growing mortgage products on the market today. The Pay Option ARM, also known as the "Pick-A-Payment" loan, "negative amortization," or the "deferred interest loan," was designed for the express purpose of freeing up cash flow so that you are best able to manage all of your other financial needs.
Most homeowners who have opted for this "outside of the box, creative financing" option, have done so for one or more of the following reasons:
- To be able to purchase your dream home with your current income
- By having greater control over how much money goes out every month towards your mortgage, you are better able to allocate a larger portion of your income towards paying off other debts
- To have greater control over the tax deductibility of mortgage interest from year to year
- To off set "seasonal" incomes (i.e. you need more cash flow during certain times of the year); you can then make the start rate or interest only payment when your income is lower, and the full payment when it is higher
- To build up your IRA or 401K retirement accounts
- To have greater cash flow for investing in real estate
- To have more cash flow to use towards paying tuition costs
- To have more cash flow for making home improvements
- Your current loan payment is too high. If you took on more payment than you can handle, this type of loan can remedy the situation until you are in a better position financially
- Many real estate investors prefer this loan product on their rental properties as it gives them greater cash flow whenever there is a vacancy
- Rather than being "stuck" in a higher payment (ie.15-yr or 30-yr fixed), the Pay Option ARM lets you control your monthly mortgage payment, rather than have your mortgage payment control you
- Lower interest rate caps than traditional ARMS -- traditional ARM products usually have an interest rate cap as high as 13.95% interest, while most Pay Option ARMS cap out at 9.95% interest
 TWO REASONS WHY YOU SHOULD NOT CONSIDER THE PAY OPTION ARM
- You plan to stay in your home forever; this is your final home and you want to pay it off
- You are not responsible about your debt. If you are just going to accumulate more debt because of your low monthly payment, this loan is not for you
WHAT HAPPENS IF I SEND IN THE MINIMUM START RATE PAYMENT?
Let's say the difference between your minimum payment and the interest only payment is $500 dollars, in other words $500 gets added to your loan balance -- what happens to the $500? Is it just added to your loan balance and that's it? No! Since you did not have to pay the $500 in the first place, it stays in your pocket! This is the difference you have to understand. This is called "cash flow"; you decide whether to send it towards the loan or keep it.
WILL MY PAYMENT INCREASE AND HOW DOES THAT WORK?
The minimum start rate payment can only increase or decrease by 7.5% of the payment amount, per year. That means that if you have a start rate monthly payment of $1000, it would then jump to $1075 for the second year. It would go to $1155 the third year, $1242 the fourth, and $1335 the fifth year. There would be an adjustment to your payment as rates move up or down. After 5-years, an Option ARM will recast which ensures that 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.
Every month you will receive a mortgage statement with 4 choices of payments:
- Minimum start rate payment usually from 1% -2%
- An interest only payment
- A full 30 year amortized principal and interest payment
- A 15 year amortized principal and interest payment
Pay Option ARMS usually have hard pre pay penalties that range from 1-3 years. Ask your loan officer about different pre pay options and how they will fit into your future financial plans.
The Pay Option ARM makes a lot of sense when you fully understand its benefits.
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