Option ARM Explained
Option ARM products are offered by an increasing number of lenders and are also known as Cash Flow Arms, Pay
Option Arms, Payment Option Arms, and Flex Pay Mortgages. They all have some things in common such as a very low start
rate and the ability to tie the loan to one of several different Indices such as the MTA, LIBOR, COFI, and CODI. All will
offer rate caps and the flexibility of four options to make the payment based on your needs.
An issue for many homeowners is in managing your monthly income and expenses, generally referred to as "cash
flow". Income can vary on a monthly basis for many reasons and unplanned expenses can come up when least expected. For many
of us, our mortgage payment is our largest monthly expense, but it is also the least flexible. The Option ARM was designed
to give you control over your mortgage payment. You have the option of choosing one of four payment options each month based
on your specific cash flow needs.
Minimum Payment A payment that is set for
either 12 or 60 months at a reduced rate. The minimum payment rate for the 12 month option is currently at 1.00%, and the
60 month option is at 1.90% with several of the 11 lenders offering the product. This option not only maximizes cash flow
but may also defer payment of some interest on your mortgage allowing greater flexibility in managing your tax deductions.
If you choose the 12 month fixed payment, the minimum payment can not increase by more than 7.5% each year after the first
year except when your loan is recast every five years or when your balance exceeds 110% of your initial loan amount. Terms
of either 30 or 40 years are available.
Interest Only Payment Defer paying principal
on your loan and improve your monthly cash flow. The money you save improves your cash flow. This option is not available
if the interest only payment would be less than the minimum payment.
Fully Amortizing Payment Options You have
the ability to make a principal and interest payment based on either a 30 year or 15 year payment schedule. I have included
a typical Option ARM statement as well.
The Option Arm series allows you to choose your index based on your own needs. You can chose from the 1 month LIBOR (London Interbank Offered Rate) or the MTA (12 Month Treasury Average). I also have access to lenders offering COFI, CODI, and COSI based option arms but these indexes are not recommended at this time
Here is a 10 year average comparison between a 30 year fixed and fully indexed LIBOR, MTA, COFI, and the 1 year
Treasury Index. Here is the above data in chart form.
Additional Options If you are looking for the additional security of a fixed payment
while taking advantage of the extremely low Option ARM rates, there is a 5 year fixed payment option. With the Option ARM
5 year Fixed Payment Mortgage, you are guaranteed a fixed minimum payment for the first five years. You still have the four
payment options to select from monthly to manage your cash flow. And, with each option, you have the ability to increase the
term of your option arm from 30 to 40 years lowering your payment further. LTVs on Option Arms are now available up to 100%!
The Minimum Payment Advantage The example below is based on a $400,000 mortgage. It
compares a traditional 30 year fixed rate payment based on the above 10 year average to the minimum payment available on the
Option ARM again based on the 10 year average. Assumes that the Minimum Payment increases by the maximum 7.5% per year.
30 Fixed
Cash Flow Minimum Monthly
Savings
Annual Savings
Year 1 $2,855
$1,287
$1,586
$18,816
Year 2 $2,855
$1,384
$1,471
$17,652
Year 3 $2,855
$1,488
$1,367
Savings over 3 years $52,872
Savings
invested at 8% $56,885
