Payment Option ARM Minimum Payment

AAA

DEFINITION of 'Payment Option ARM Minimum Payment'

An option to make minimum payments on an payment option ARM, which is a complex mortgage product with a temporary low interest rate. After the expiration of the temporary start rate, the borrower retains the option to make a payment equal to the initial payment established by the start rate: the minimum payment option. Unfortunately, there is a high probability that choosing this minimum payment will create negative amortization, where you owe more after making payments than you owed before you started paying the loan back.

INVESTOPEDIA EXPLAINS 'Payment Option ARM Minimum Payment'

Making the minimum payment on a payment option ARM may be used by a borrower with irregular cash flows throughout the year. For example, a borrower who receives a large percentage of their annual income in the form of a year-end bonus might make minimum payments for a large part of the year, and then make a single large mortgage payment when they receive their annual bonus. Or, a borrower might make a minimum payment to make a home more affordable while counting on the rate at which the value of their home appreciates to outpace the rate at which negative amortization takes place.

RELATED TERMS
  1. Negative Amortization Limit

    A provision in certain loan contracts that limits the amount ...
  2. Flexible Payment ARM

    A type of adjustable-rate mortgage that allows the borrower to ...
  3. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
  4. Negative Amortization

    An increase in the principal balance of a loan caused by making ...
  5. Deferred Interest

    The amount of interest that is added to the principal balance ...
  6. Payment Option ARM

    A monthly adjusting adjustable-rate mortgage (ARM) which allows ...
Related Articles
  1. ARMed And Dangerous
    Insurance

    ARMed And Dangerous

  2. Understanding The Mortgage Payment Structure
    Credit & Loans

    Understanding The Mortgage Payment Structure

  3. Option ARMs: American Dream Or Mortgage ...
    Home & Auto

    Option ARMs: American Dream Or Mortgage ...

  4. Payment Option ARMs: A Ticking Time ...
    Bonds & Fixed Income

    Payment Option ARMs: A Ticking Time ...

Hot Definitions
  1. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  2. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  3. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  4. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  5. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  6. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
Trading Center