Option Arm Mortgage Loans: How Do They Work?

Typically, option arm mortgage loans give the consumer four payment options each month - a 30year fixed payment, a 15 year fixed payment, an interest only payment and a deferred interest or minimum payment.

The 30 year, 15 year and interest only payments are based on the fully indexed rate. The fully indexed rate is calculated by adding the margin to the index. The index would most likely be the Libor, MTA, COSI, COFI, or CODI.

Heres an example:

Lets say you have a margin of 3.15 and an index of 3.32. This would give you a fully indexed rate of 6.47% (3.15 + 3.32 = 6.47). This is the rate that is used to compute the 30 year, 15 year, and interest only payments.

Depending on the lender and loan program you select, the deferred interest or minimum payment could either stay fixed between 1% and 2% for 5 years or the PAYMENT could start at around 1% and go up or down a maximum of 7.5% annually for 5 years.

The minimum 1% to 2% payment is an interest only payment and is based on a 30 or 40 year amortization.

The reason an option arm loan is called a deferred interest or negative amortization loan is because the difference between the minimum 1% payment and the interest only payment is added to the loan amount each month if the consumer chooses to make the minimum payment. So the loan balance increases over time instead of decreasing.

Once the loan hits the 5 year mark or if the deferred interest reaches 110% or 115% of the original loan amount, the loan will recast. Which means it will convert to an interest only or principal and interest loan at the fully indexed rate.

The fully indexed rate is calculated monthly and therefore could change from month to month.

Here are a few benefits of the option arm mortgage loan:

* The minimum payment is 100% interest; therefore, 100% of the payment is tax deductible

* The deferred interest is mortgage interest so it may be tax deductible

* If the client makes bi-weekly payments, the amount of deferred interest will decrease by approximately 30% or be completely eliminated.

* The minimum payment increases the clients cash flow

* This loan gives the client several payment options

* It also allows clients to use their mortgage as a financial tool to build wealth.

In closing, here are four important points to keep in mind when selecting an option arm loan program:

1) Get a 30 year amortization (not 40 years). The 30 year amortization will keep the 1% payment option available longer.

2) Choose an index which is less volatile. Like the MTA instead of the Libor.

3) Select an option arm program that has a 115% recast instead of a 110% recast to increase the chances of the payment options being available for the full 5 years.

4) Select an option arm with a low lifetime interest rate cap

For more information on this and other mortgage related topics, please visit:

http://Mortgage-Training.Mortgage-Leads-Generator.com

Please feel free to reprint this article as long as the resource box is left intact and all links are hyperlinked.

Hartley Pinn has recently created the Mortgage Leads Generator Training Course to teach people how to make over $50,000 a month working part-time (10 to 15 hrs per week) as a mortgage loan officer.

Second Mortgage Loans
A second mortgage is a loan that is subordinate to another loan taken against the same property. They are called subordinate ...

When Is A Second Mortgage Loan A Good Idea?
A second mortgage loan is a loan taken after the first mortgage, with the property used in the first mortgage as collateral. ...

Florida Refinance Mortgage Loans
Refinance mortgage loans are an effective way to decrease the debt on existing loans. Whether it is a credit card debt or a d...

How Option One Mortgage Loans Work
In a regular mortgage, the borrower pays a specific amount each month in order to pay the mortgage off in full by the end of ...

What is Hybrid Mortgages/Loans?
Over the last several years consumers have started to request alternative financing to a traditional mortgage from lending co...

Option ARM: Beware These Risky Mortgage Loans
The popularity of Option Adjustable Rate Mortgages has skyrocketed over the last year, mainly because of their ease of qualif...

An Introduction To California Home Mortgage Loans
A home mortgage is a long-term loan, usually taken for a house or a property, for a large amount. The interest rate and the b...

California Mortgage Loans
California mortgage loans help home buyers and home owners residing in California raise cash for their personal, business or ...

Refinance Mortgage - A Convenient Way to Pay Off Your Loans
As inflation rises and the cost of living touches the sky individuals in every income bracket are struggling to make a living...

Option Mortgage Loans What You Need to Know
If you are a homeowner considering using one of these ultra risky option adjustable rate mortgage loans, you need to understa...

Difficulties Doing a Home Equity Loan Behind a Negative Amortization Mortgage (Payment Option Loans)
If you need a home equity loan to refinance debt and currently have a negative amortization loan as your first mortgage, you ...

Debt Consolidation Mortgage Loans
With the rise of consumer debt, an attractive mortgage option is the debt consolidation mortgage loan. With this loan buyers ...

Debt Consolidation Home Mortgage Loan-Tips To Help You Get The Most From One
A debt consolidation home mortgage loan is a perfect way to reduce your debt obligations and manage your finances more effect...

California Mortgage Refinance Loans
A California mortgage refinance loan is a good solution for those individuals in California who cannot meet their monthly mor...

2nd Mortgage Loan After Bankruptcy - Should You Get a 2nd Mortgage?
A second mortgage loan after a bankruptcy is a valid choice for some people. With your home as your collateral, a home equity...

Maine Mortgage Loan Companies
Maine mortgage companies are expert moneylenders that offer various kinds of mortgage loans and others services. These mortga...

Mortgage Loans Explained In Plain English
With the many different kinds of mortgage loans out there, choosing the right one for your needs can be a difficult task. The...

How to Save With Equity 100% Mortgage Loans
One of the popular options available for home owners considering equity loans is the 100% equity mortgage loan. A main advan...

Home Mortgage Loans: Buying Your First Home but Low on Cash? Read On
If you are buying a home for the first time and are looking to apply for a mortgage loan, one of the recommended paths is thr...

Prevent Your Poor Credit History With Poor Credit Mortgage Loans
Poor credit mortgage loans are becoming hot favourites among people afflicting due to poor credit history. There can be numer...