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Option Arm Mortgages Can Give Your Budget a Breather

By: Paul Goodson

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If you are looking for a mortgage with flexibility, then one of the most flexible mortgages available today is the Option Arm Mortgage. It's flexibility also gives you the capability of saving or, at least forestalling, a foreclosure if you are facing increased expenses or if drastically reduced income is on the horizon.

Perhaps you are self-employed, or maybe you have the type of job that causes your income to vary from month to month. If you are in that situation, how would you like to be able to pay a low mortgage payment when the income dips, and conversely pay the regular amortized payment when your income spikes? Many commissioned sales people would love to have a mortgage with just such payment options. And, no, this mortgage is not just wishful thinking. It exists, and is available to almost everyone who qualifies for a traditional mortgage.

The Option Arm Mortgage is flexible because every month you have the option of making one of four mortgage payments: a fully amortized payment based on 30 years or 15 years, an interest only payment, or an extremely low interest payment that defers about one-half of the interest, which is added to the mortgage balance.

The Option Arm mortgage is also an excellent choice if you plan on selling in a few years, or if your income will increase over the next few years, or if you want to maximize your home-buying capacity. This assumes that you want to make the minimum payment and, for one reason or another, you are looking to conserve cash or maximize cash flow.

Almost all professionals agree that the current slowdown in the real estate market is temporary and that home appreciation will resume it's long-term upward trend in the near term. With this in mind, you can look at making minimum payments, and adding the deferred interest to your mortgage balance as simply a way of capturing a small percentage of your equity appreciation. Every savvy investor understands that the only way to tap the equity in your home is to sell it, or to refinance.

Since the initial interest rate and payment is low for the minimum payment option, you can probably qualify for a larger loan under the option ARM than you can with a traditional ARM or fixed rate mortgage. It is also a good alternative if you find yourself in the situation where your income has dropped and you are looking at the prospect of defaulting on a high payment mortgage.

Payments are calculated at the interest rate in month 1, which can be as low as 1.25%, and payments can only rise by 7.5 % a year for a specified number of years.

There are risks you should be aware of, one of which is that the monthly payment will eventual rise to the amount required to pay off the mortgage balance over the next 30 years.

If you choose the minimum payment every month, and the deferred interest is added to the mortgage balance, you need to be aware that the loan balance cannot exceed a specified negative amortization maximum, which can range from 110% to 125% of the original loan balance. If the mortgage balance achieves that specified maximum amount, the payment will increase to an amount that equals a fully amortized mortgage over 30 years.

In order to lower your risk, it is best to choose the highest payment you can afford each month. That way, when the payments increase down the road, there will less shock to your budget.

If you are in a tight budget situation, and you are facing the prospect of being unable to make payments on the existing mortgage, then the Option Arm Mortgage is something you should definitely consider.

Even though you are adding the deferred interest to your mortgage,it is certainly better than having a foreclosure stain your credit record for the rest of your life.

If your mortgage broker doesn't offer you the Option Arm Mortgage as a choice, you should request that they at least provide you with a rate quote on one. Just make sure that they give you a payment schedule for all four payment options.

Article Source: http://depositarticles.com/

Paul Goodson is a staff member of a licensed Arizona mortgage company located in Phoenix, Arizona. He is also the Editor-in-Chief of an Arizona Refinance and Arizona Mortgage website. He has written extensively about mortgage products and services.

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