Option ARM mortgages give you flexibility that is unmatched by virtually any other home loan product available in today's market. Option ARM mortgages offer low adjustable interest rates with the security of a fixed minimum payment. In fact, you have four different payment options each month with an Option ARM, allowing you to choose the payment that best fits your needs at anytime.
If your budget is a bit tight, you can choose to make the interest–only payment or the minimum payment––two payments that are lower than a standard mortgage payment. In months when your budget is not so tight, you can use the extra money toward saving for retirement, paying off high–interest debt, making home repairs, or financing college expenses. The choice is yours.
Option ARM Mortgages — Your Month–to–Month Flexibility
Minimum Payment
The minimum payment on Option ARM mortgages is the lowest of the four payment options, since it is less than the amount needed to cover the interest for the month. This is known as deferring your interest.
Generally speaking, with most Option ARM mortgages, your minimum payment may change each year, it can only increase a certain percentage of the previous year's minimum payment amount. Then every five years, your minimum payment is recalculated to help you stay on track to pay off your loan. After each recalculation, your new minimum payment will be based on your current interest rate, your unpaid principal balance and your remaining loan term. However, the payment cap will not apply.
Interest–Only Payment
The interest–only payment on an Option ARM mortgage is the second lowest payment option and is the amount needed to repay the full interest due each month. No principal is paid down unless you choose to include an additional amount. Any additional amount on top of the amount needed to cover the interest will be applied to your principal.
30–Year Amortization Payment
The 30–year amortization payment is higher and pays down the loan faster than the minimum or interest–only payments. If you decide to make the 30–year amortization payment on your Option ARM, you're paying an amount equal to what is needed to pay off your loan in 30 years, based on the initial fixed interest rate and current loan balance.
15–Year Amortization Payment
If you decide to make the 15–year amortization payment, you're paying an amount that is needed to pay off your loan in 15 years based on the initial fixed interest rate and current loan balance. This is the highest payment available and is designed to pay down your loan faster than any other option.
Who May Benefit From Option ARM Mortgages
Flexibility alone makes an Option ARM mortgage an excellent choice for borrowers who don't have a fixed income or for people with fluctuating income-like people who work on commission or self–employed borrowers; even people who are serious investors who want to channel their money into their investments, rather than their mortgage.
Without a fixed income, it can be hard to meet a mortgage payment on time during slow months at work. Say you have a bad month of commission-sales are down; you have to fix your car; and finances are pretty tight. With an Option ARM loan, you can choose to make just the minimum payment to get you through the month, and then make a larger payment when things pick up. Having a safety net like this is much less stressful than falling behind on your mortgage payments.
But keep in mind, this type of loan is not for everyone. This is the kind of loan that is for clients that can soundly manage their finances––people who are at least somewhat knowledgeable when it comes to things like managing and investing their money. For instance, this loan might be perfect for someone who is in sales and works on commission and who knows how to get by when sales are down. This is not the kind of loan for people who may have lots of debt and are looking to only pay the minimum payment all the time.
Here's why: Your minimum payment on Option ARM loans may not fully cover the interest that accrues monthly. This is known as "deferred interest." If the minimum payment doesn't cover the entire interest owed, it gets tacked onto your loan balance which means you can get into trouble very quickly, if you don't know what you're doing. Your loan balance can actually increase as you make these low payments. You can elect to use the minimum payment as often as you like, but if used too often without making some larger payments in between, you could end up with a mortgage balance that is higher than the value of your home. Quicken Loans offers an option ARM mortgage with a minimum payment that limits how much interest is deferred. Our option ARM program calculates your minimum payment based on your interest rate minus a percentage for the first five years until it reaches the maximum deferred interest level of about 115 percent (New York 110 percent). During the first five years, your rate is fixed. After that, it becomes a six–month fully–amortizing ARM. When that happens, the loan loses its potential to be a negatively amortizing loan. If you're looking into getting an option ARM, look for one that limits the potential for deferred interest or negative amortization.
Learn More About Option ARM Mortgages
Our home loan experts can help you determine whether an Option ARM is right for your financial situation. For more information on Option ARM mortgages, call 800-251-9080 to talk to a Refinance Expert at Quicken Loans or read more about our Secure Advantage loan. You may also download the Consumer Handbook on Adjustable Rate Mortgages.
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