Flexible Payment ARM

DEFINITION of 'Flexible Payment ARM'

A type of adjustable-rate mortgage that allows the borrower to select from four different payment options each month: a 30-year, fully amortizing payment; a 15-year, fully amortizing payment; an interest-only payment or a "minimum payment".

Flexible payment ARMs are also known as "payment option ARMs".

BREAKING DOWN 'Flexible Payment ARM'

Flexible payment ARMs are popular in high-cost areas during times of rising home prices. Borrowers who chose to make the minimum payment option care little about the amount that is added to their mortgage balances through negative amortization as it is easily eclipsed by the rising value of their homes. This is a risky strategy. A past history of rising home values should not be used to project future home values.

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