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. Payment Option ARM

    A monthly adjusting adjustable-rate mortgage (ARM) which allows ...
  2. Mortgage Index

    The benchmark interest rate an adjustable-rate mortgage's fully ...
  3. Negative Amortization

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

    The amount of interest that is added to the principal balance ...
  5. Negative Amortization Limit

    A provision in certain loan contracts that limits the amount ...
  6. Adjustable-Rate Mortgage - ARM

    A type of mortgage in which the interest rate paid on the outstanding ...
RELATED FAQS
  1. What is the difference between "closed end credit" and a "line of credit?"

    Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
  2. In what instances does a business use closed end credit?

    The most common types of closed-end credit used by both businesses and individuals are mortgages and auto loans. Businesses ... Read Full Answer >>
  3. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>
  4. How was the American Dream impacted by the housing market collapse in 2008?

    The American Dream was seriously damaged by the housing market collapse in 2008. In many ways, the American Dream is a self-fulfilling ... Read Full Answer >>
  5. How much risk is associated with subprime mortgages?

    A large amount of risk is associated with subprime mortgages. Since the mortgages are specifically for people who do not ... Read Full Answer >>
  6. What are the financial consequences of filing for bankruptcy?

    The financial consequences of filing for bankruptcy are substantial and can be long-lasting. They include impacts on your ... Read Full Answer >>
Related Articles
  1. Insurance

    ARMed And Dangerous

    In a climate of rising interest rates, having an adjustable-rate mortgage can be risky.
  2. Credit & Loans

    Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  3. Home & Auto

    Option ARMs: American Dream Or Mortgage Nightmare?

    Option adjustable rate mortgages could make or break your home-buying experience.
  4. Bonds & Fixed Income

    Payment Option ARMs: A Ticking Time Bomb?

    With these mortgages the loan's principal can continue to increase - even as payments are made.
  5. Home & Auto

    Are Home Inspections Worth It- Price vs. Value

    If you’re wondering whether home inspection is worth the investment, the following information will help you decide.
  6. Home & Auto

    How the Fed Affects Reverse Mortgages

    An in depth look at how the Federal Reserve affects reverse mortgages.
  7. Investing

    Where Are Real Estate Stocks Heading?

    We summarize five economic reports that investors should monitor monthly to keep them informed of where real estate and its related stocks are heading.
  8. Home & Auto

    Protect Yourself Against Reverse Mortgage Scams

    You could lose not only money, but also your home, if you fall for these schemes.
  9. Home & Auto

    Find a Reverse Mortgage Lender You Can Trust

    Reverse mortgages are a notorious lending market. Follow these steps and the chances are good you’ll find a trustworthy, competent lender.
  10. Home & Auto

    Do You Qualify for a Reverse Mortgage?

    See whether you meet the age qualifications and other requirements for getting a reverse mortgage.

You May Also Like

Hot Definitions
  1. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  2. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  3. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  4. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  5. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  6. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!