Payment Option ARM Minimum Payment

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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.

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