Option adjustable rate mortgages (ARMs) give you the option of making different mortgage payments each month, including the traditional payment of principal and interest, an interest only payment or a minimum mortgage payment which can be less than the amount of interest due that month.
The last payment option can be dangerous of not used properly because the amount of any interest you do not pay will be added to your mortgage balance, increasing the total amount you owe and increasing your future monthly mortgage payments. This process is called negative amortization.
The interest rate on a option ARMs are usually very low for the first few months or first year, sometimes this rate is referred to as the “teaser rate”. Your monthly mortgage payments are also lower during the initial period because the mortgage rate is lower. After the initial teaser rate period has ended, the interest rate rises to an interest rate closer to the market rate for mortgages at the time and your mortgage payments also rises.
Option ARMs were originally created for people who expected their income to increase in the future, making it possible for them to afford a larger home now instead of waiting until their income increased in the future. Unfortunately, over the past few years, option ARMs were also marketed and written for people who couldn’t afford payments when the initial interest rate period ended. This practice extended the housing boom but has also make the housing bust even worse than it would have been. In fact, some real estate professionals say another wave of foreclosures is on it’s way because of option ARMs.
Author: Brian McKay
May 6th, 2009
