Flexible Payment Mortgages
by: LendingTree Editorial Staff
With most mortgages, your
payment is the same every month. But what if your
paycheck isn’t so regular? Would you like to be
able to vary your mortgage payment depending on your
cash flow? An option ARM -- also called a flex-ARM or
pick-a-payment loan -- allows you to do just that.
How does it work?
An option ARM is an
adjustable-rate mortgage with a twist. You don’t
pay a set amount each month. Instead, the lender
sends a monthly statement with up to four payment
options. You simply choose the amount you want to pay
that month and then submit your payment.
The options vary, but
here’s the most common menu:
Minimum payment: This is
calculated using an “initial” interest rate
that can start as low as 1.25 percent. Because this
payment is so low, it’s useful for months when
you don’t have much cash on hand, perhaps
because you are waiting for a commission or bonus
check. But any unpaid interest gets deferred, or
added to the principal of the loan, so your principal
grows.
Interest only: You pay all the
interest due, but none of the principal. This
doesn’t reduce your mortgage balance, but it
allows you to avoid deferring interest.
30-year amortized: This matches
the monthly payment of a mortgage amortized over 30
years at your current interest rate. It includes both
principal and interest.
15-year amortized: The same as
above, but amortized over 15 years. This is the
highest monthly payment. Choosing it allows you to
reduce your principal faster than any other option.
The fine print
The biggest caveat with option
ARMs is that those enticing initial rates are
short-lived. The low minimum payments that make these
mortgages so attractive can increase dramatically. In
addition, every five years, the loan is recast --
that is, a new amortization schedule is drawn up to
ensure that the remaining balance will be paid off by
the end of the loan’s term. When that happens,
the minimum payment can be pushed even higher.
What’s more, if you defer
too much interest, you can reach what’s called
negative amortization. If your balance grows to 10
percent to 25 percent (depending on state law)
greater than the original principal, your loan is
automatically recast and you have to start paying the
fully amortized rate, which will increase your
monthly payments.
Another potential downside of
option ARMs is that they’re more complicated
than most other mortgages. Home buyers may be seduced
without fully understanding how much the minimum
payments will increase over the long-term. When the
monthly amounts go up, these people can experience
payment shock.
To learn more about flexible
payment mortgages, visit http://www.lendingtree.com/cec/yourhome/yourmortgage/open-arms.asp
About
The Author
The editorial
staff at LendingTree is committed to helping
consumers become smarter borrowers. Visit http://www.lendingtree.com/cec for more information and tips
on buying, selling, and financing a home.
Copyright 1998-2006, LendingTree, LLC.
|
| Ebay India is the
largest shopping site.Become a seller or
buyer on Ebay |
|
|
