Option ARM is a general term used to describe mortgages which allow borrowers to choose from multiple payment options every month. While Option ARM mortgages go by many names, they have one feature in common:

The Minimum Payment Option
By including a Minimum Payment Option on the borrowers monthly payment coupon, Option ARM-type mortgages allow you to actually defer mortgage interest until a later date by making a lower payment than would otherwise be required. Minimum payment options can be as low as one percent or even lower. In fact start rates of 0.25% are available.

Option ARM loans are widely cited in the media as causing negative amortization, or the increase in the borrower's loan balance. In fact, the mortgage itself is not what causes negative amortization, it is the choice of a borrower in any given month whether or not to defer interest or make a larger payment to the principal balance of the loan. Understanding that interest which you are permitted to defer must eventually be paid is the key to understanding how to effectively utilize an Option ARM mortgage to improve your financial situation.

Deferring Interest by selecting the minimum payment option of an Option ARM mortgage is a popular way to effectively increase cash flow by tapping into the equity in your home. Unlike Home Equity Line of Credit and Home Equity Loan mortgages, deferring interest on an option ARM does not mean a higher payment today. Instead, interest which is unpaid is deferred until the option ARM loan recasts, which is generally after 5 to 10 years or when the loan balance increases past a pre-defined negative amortization limit.

Option ARM loans are not in fact all pure ARM loans, or Adjustable Rate Mortgages. In fact, we now offer loans with all of the minimum payment flexibility and ability to defer interest that an Option ARM offers, but with fixed rates for 3, 5, 7 or 10 years. There is a even a Fixed Rate Cash Flow loan available which has a fixed rate for a full 30 years.

Option ARM mortgages are not ideally suited for borrowers who cannot afford to make anything more than the minimum payment except in cases of temporary emergency or lifestyle change. While you may be qualified for an option ARM mortgage, it is important to determine whether or not you will be able to make more than the minimum payment once the initial start rate expires or the loan recasts in 5 or 10 years. If you are using an Option ARM to purchase real estate which would otherwise be outside of your price range, you may wish to reconsider use of an Option ARM mortgage.

Typically Option ARM loans allow borrowers to defer from 115% to 125% of the balance of the loan over the course of the initial "minim payment" period which may last from 5 to 10 years. In California and Florida along with a handful of additional states we offer certain loan products which allow up 135% to be deferred, and in New York nearly all option ARMs are limited to a negative amortization cap of 110%.

The more interest you are permitted to defer, the more equity you are able to tap over the course of the initial period in exchange for enhanced cash flow.

Option ARM minimum payments are typically 40% to 50% lower than a normal mortgage payment for the same loan amount, which means you can defer up to half the interest due on your Option ARM mortgage during the initial period. Because of the extremely low minimum payment rates, Option ARMs have been the favorite mortgage of the self employed, business owners, high net worth individuals, and real estate investors for several years.

Option ARM may increase your principal balance if your minimum payment is less that your interest only payment. The difference between the interest only payment and minimum payment will be added to your principal balance causing your principal to increase.