DEFINITION of 'Payment Option ARM'

A monthly adjusting adjustable-rate mortgage (ARM) which allows the borrower to choose between several monthly payment options: a 30 or 40-year fully amortizing payment, a 15-year fully amortizing payment, an interest-only payment, a minimum payment or any amount greater than the minimum payment.

The minimum payment option is calculated based on an initial temporary start interest rate. While this temporary start interest rate is in effect, this is the only payment option available. It is a fully amortizing payment. After the temporary start interest rate expires, the minimum payment amount remains a monthly payment option; however, whenever a payment is made which is less than the scheduled interest-only payment, deferred interest is created.

BREAKING DOWN 'Payment Option ARM'

Payment option ARMs have a great deal of payment-shock risk. The monthly payments might increase for several reasons, including an unscheduled recast when a negative amortization limit is reached. The fully indexed interest rate is important in this calculation. The rate of negative amortization is a function of the interest-only payment (based on the fully indexed interest rate) and the minimum payment. If the fully indexed interest increases substantially, the rate of negative amortization increases when the minimum payment is made, increasing the likelihood that the negative amortization limit will be reached and the mortgage will recast.

RELATED TERMS
  1. Flexible Payment ARM

    A type of adjustable-rate mortgage that allows the borrower to ...
  2. Fully Amortizing Payment

    A periodic loan payment, part of which is principal and part ...
  3. Payment Option ARM Minimum Payment

    An option to make minimum payments on an payment option ARM, ...
  4. Growing-Equity Mortgage

    A fixed rate mortgage on which the monthly payments increase ...
  5. Payment Shock

    The risk that a loan's scheduled future periodic payments may ...
  6. Graduation Rate

    The percentage increase in the monthly payment on a graduated ...
Related Articles
  1. Personal Finance

    Choose Your Monthly Mortgage Payments

    Exotic mortgages allow you to decide how much to pay. Find out how much they really cost.
  2. Investing

    Payment Option ARMs: A Ticking Time Bomb?

    With these mortgages the loan's principal can continue to increase - even as payments are made.
  3. Personal Finance

    Mortgage Amortization Strategies

    Should you get a 30-year mortgage? A 15-year one? Ways to decide which mortgage is the best fit.
  4. Personal Finance

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
  5. Personal Finance

    This ARM Has Teeth

    Find out how to avoid getting bitten when your mortgage rate resets.
  6. Personal Finance

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  7. Personal Finance

    Make A Risk-Based Mortgage Decision

    Find out how to choose which mortgage style is right for you.
  8. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  9. Personal Finance

    What is an Amortization Schedule?

    An amortization schedule is a table that shows the amounts of principal and interest that comprise each loan payment.
RELATED FAQS
  1. Are student loans amortized?

    Student loans typically get paid back over time on a fixed payment, or amortized, schedule. Read Answer >>
  2. How should you choose the amortization period for your mortgage?

    Read about key considerations that homeowners should take into account before choosing the amortization period for their ... Read Answer >>
  3. How is the minimum payment on a credit card calculated?

    Even when minimum payments are low, consumers should still aim to pay off credit card balances every month. Read Answer >>
  4. Is there any time I would want to have a zero-principal mortgage?

    As a general rule, entering a zero principal mortgage, or what is commonly referred to as an "interest-only mortgage", is ... Read Answer >>
  5. What does amortization mean in the context of a pension plan?

    Discover when and why accountants use amortization techniques in the context of pension plans, and why those changes help ... Read Answer >>
Trading Center