What is a Payment Option ARM Minimum Payment
A payment option ARM minimum payment is an option to make minimum payments on a payment option ARM, which is a complex mortgage product in the form of a monthly adjusting adjustable rate mortgage with a temporary low interest rate.
BREAKING DOWN Payment Option ARM Minimum Payment
A payment option ARM minimum payment is the least amount a borrower can pay on the payment option ARM loan while still satisfying the terms of the loan agreement.
The minimum monthly payment is an option, so the borrower can choose whether to make a payment of only that amount or to submit a higher payment. However, when a payment that is less than the scheduled interest-only payment is made, deferred interest will accumulate.
Borrowers must research all aspects of a payment option ARM carefully before entering into a contract for this type of loan. This kind of mortgage can have a complex structure and intricate terms and requirements, along with an unusual payment schedule and structure. Once the initial interest rate period has passed, the loan may have a number of different payment options and loan periods ranging from a 15-year fully amortizing payment to a 30-year or 40-year fully amortizing payment.
Considerations of Payment Option ARM Minimum Payment
A low monthly payment on an outstanding loan may sound like an appealing scenario, and many borrowers may automatically assume this would be a good choice, but they must consider the consequences of opting to make only a payment of this minimum required amount.
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.
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.