What Is a Payment Option ARM Minimum Payment?

The term payment option ARM minimum payment refers to the required payment on a payment option ARM. It is the least amount a borrower can pay on the payment option ARM loan while still satisfying the terms of the loan agreement. Since it is only an option, a borrower may make higher payments toward the loan. Minimum payments are normally calculated on a temporary interest rate at the beginning of the loan.

Key Takeaways

  • A payment option ARM minimum payment allows borrowers to make minimum payments on a payment option ARM.
  • Minimum payments are normally calculated on a temporary interest rate at the beginning of the loan.
  • Although borrowers are only required to make the minimum payment, they may also put down more money each month.
  • This type of payment option ARM is well-suited to borrowers with irregular cash flows.

How Payment Option ARM Minimum Payments Work

An adjustable-rate mortgage (ARM) is a popular type of mortgage product. ARMs give borrowers a fixed interest rate during the initial period. Once this time expires, rates adjust at regular intervals—either monthly or annually—based on a benchmark index. ARMs are good options for borrowers who don't mind the fluctuations in rates as well as those who intend to pay off their loans by a certain time.

One type of ARM is the payment option ARM. This kind of mortgage gives the mortgagor a few choices on how they wish to make their monthly payments. Some payments are amortized over the life of or a certain period of the loan, while other loans allow borrowers to make interest-only or minimum payments. A mortgage that involves the last choice is called a payment option ARM minimum payment loan.

Payment option ARM minimum payments are complex mortgage products. They come in the form of an adjustable-rate mortgage that adjusts every month with a temporary interest rate that's often very low. As mentioned above, it's the lowest amount of money the mortgagor must pay in order to keep the loan in good standing as per the agreement with the lender. Although the borrower may make the minimum payment, that's only an option. This means they can make payments above the required minimum. If the borrower doesn't make the minimum payment, deferred interest will accumulate.

Deferred interest accumulates if you miss your minimum payment in this type of payment option ARM.

This type of payment option ARM is well-suited to borrowers with irregular cash flows. For example, a borrower who receives a large percentage of their annual income in the form of a year-end bonus may 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 may 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.

Special Considerations

A low monthly payment may sound appealing, and many borrowers may automatically assume this would be a good choice. But they must consider the consequences of taking a payment option ARM that allows them to make a minimum payment before entering into this type of contract. 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 passes, 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.

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. But there is a high probability that choosing this minimum payment will create negative amortization, where the borrower owes more money after making payments than they owed before they began paying back the loan.