Option Adjustable-Rate Mortgage - Option ARM


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.

BREAKING DOWN '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.

  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. Mortgagee

    An entity that lends money to a borrower for the purpose of purchasing ...
  5. Conventional Mortgage

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

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