Payment Option ARM: Getting a Second Mortgage Behind a Negative Amortization 1st Loan
Over the last several years, payment option adjustable rate mortgages (ARMs) have become very popular among homeowners thinking about refinancing or taking out a home equity loan (second mortgage). With an option ARM, you have the ability to pick from several different payment options each month. According to BD Nationwide Mortgage, those loan options are as follows:
Pay the full amount, covering both the principal and the interest due for the month.
Pay only the interest for the month.
Pay a predetermined minimum payment amount.
With the minimum payment option, negative amortization comes into play. Bankrate defines negative amortization as, "A gradual increase in mortgage debt that happens when the monthly payment does not cover the entire principal and interest due. The shortfall is added to the remaining balance." In other words, even after you have paid the minimum payment, you owe more on your loan at the end of the month than you did at the beginning. Negative amortization occurs because the minimum payment for the loan is based upon the low introductory rate offered for the first month. The minimum payment amount is adjusted annually, however after the first month of the option ARM, the interest rate will adjust monthly according to one of the following indexes: COFI, MTA or the one-month LIBOR.
Payment option ARMs are attractive to homeowners with irregular or unpredictable incomes. They also appeal to those who want to have as much cash flow each month as possible. However, there are risks involved. If a homeowner consistently pays only the minimum payment amount, each month the balance on their loan will continue to grow. Some loans carry a negative amortization cap (110% to 125% of the original amount of the loan). Once that cap is reached, the minimum payment may rise. For the first five years of the loan, the minimum payment can only increase by a certain percentage. However, after five years, the minimum payment may increase significantly.
Payment option ARMs have benefits, but also risks. Before getting this type of loan it is extremely important to talk to your mortgage professional about the risks under various interest rate trends.
Jennifer is a famous web editor and writer who has published many home mortgage and real estate related articles for Home Loan Refinance & Second Mortgages & Option Arm Mortgage Refinance. If you need more information regarding debt consolidation or current home interest rates, please visit the Second Mortgage Loan Consolidation.
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