Option Adjustable-Rate Mortgage - Option ARM

AAA

DEFINITION of 'Option Adjustable-Rate Mortgage - Option ARM'

A type of mortgage where the mortgagor (borrower) has several options as to which type of payment is made to the mortgagee (lender). In addition to having the choice of making payments of interest and principal that amounts to those made in conventional mortgages, option ARMs also have alternative payment options where the mortgagor can make significantly smaller payments by making interest-only payments or minimum payments.

INVESTOPEDIA EXPLAINS 'Option Adjustable-Rate Mortgage - Option ARM'

Since many option ARMs offer a low teaser rate, many mortgagors unknowingly refinance their present mortgage in hopes of making lower payments. Unfortunately, once these short-term teaser rates expire, the rates of interest are returned back to those similar to conventional mortgages.

Furthermore, for those unlucky mortgagors that elected to make minimum payments, they will find that the principal owed on their mortgage has actually increased. This is because the value of minimum payments did not entirely cover the mortgage's interest. The uncovered interest would then be added to the mortgage's principal.

RELATED TERMS
  1. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Capped Rate

    An interest rate that is allowed to fluctuate, but which cannot ...
  3. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
  4. Conventional Mortgage

    A type of mortgage in which the underlying terms and conditions ...
  5. Mortgagor

    An individual or company who borrows money to purchase a piece ...
  6. Mortgagee

    An entity that lends money to a borrower for the purpose of purchasing ...
Related Articles
  1. Insurance

    ARMed And Dangerous

  2. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

  3. Home & Auto

    When (And When Not) To Refinance Your ...

  4. Home & Auto

    Option ARMs: American Dream Or Mortgage ...

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center