What Is a Payment Option ARM Minimum Payment?

A payment option adjustable-rate mortgage (ARM) minimum payment allows borrowers to make minimum payments 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.

An 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.

Key Takeaways

  • A payment option adjustable-rate mortgage (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 a Payment Option ARM Minimum Payments Works

A payment-option ARM is a type of monthly adjusting ARM where the borrower can choose between several monthly payment options, including the minimum payment. Since it is only an option, a borrower may make higher payments toward the loan. Borrowers may also choose one of the following options: 

  • A 30 or 40-year fully amortizing payment
  • A 15-year fully amortizing payment
  • An interest-only payment

Minimum payments are normally calculated on a temporary interest rate at the beginning of the loan. While this temporary interest rate is in effect, this is the only payment option available; it is a fully amortizing payment. After the temporary start interest rate expires, the minimum payment amount remains a monthly payment option.

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.

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.

Alternatively, 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.

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

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.