Option ARM
1% Option ARM, 21st Century Lending Explained
You’ve heard the talk on the streets or maybe you even know someone who has one. Of course we’re talking about the 1%Option ARM! This loan has become quite fashionable these days. What is it about the Option ARM that has set the lending world on fire?
This variety of Option ARM (an adjustable rate loan that gives payment options) usually has a start rate of 1% - 1.75% and is linked to a variety of indexes such as COFI, MTA, etc. (more on these later). This loan generally has 4 payment features but it’s the 1% payment option that grabs everyone’s attention.
This payment option is based upon a 1% Principal & Interest loan over 30 years and is ridiculously low! There is simply no more flexible loan on the market. The payment on $300,000 loan is only $965 per month!
What’s better, this payment is usually fixed for the first year and can only gradually increase for the first 5 years. Each year for the first 5 years your payment (not your rate!) can only go up a maximum of 7.5% per year, pretty much assuring a very low payment for the first 5 years.
This loan allows the borrower to achieve the lowest mortgage payment available to them. When you have the lowest payment possible you have money for other things like investments (see below) or getting more house.
This variety of Option ARM (an adjustable rate loan that gives payment options) usually has a start rate of 1% - 1.75% and is linked to a variety of indexes such as COFI, MTA, etc. (more on these later). This loan generally has 4 payment features but it’s the 1% payment option that grabs everyone’s attention.
This payment option is based upon a 1% Principal & Interest loan over 30 years and is ridiculously low! There is simply no more flexible loan on the market. The payment on $300,000 loan is only $965 per month!
What’s better, this payment is usually fixed for the first year and can only gradually increase for the first 5 years. Each year for the first 5 years your payment (not your rate!) can only go up a maximum of 7.5% per year, pretty much assuring a very low payment for the first 5 years.
This loan allows the borrower to achieve the lowest mortgage payment available to them. When you have the lowest payment possible you have money for other things like investments (see below) or getting more house.
What’s the catch? There must be a catch, right? Well, your house may wind up making a portion of your mortgage payment for you. This loan can sometimes eat into equity a little at a time. It’s easier to understand why & how this can happen by examining the rest of the loan.
This loan also has 3 other payment options: “Interest Only”, 30 year Principal & Interest and a 15 year P & I. The way all 4 payments are computed is by taking a predetermined margin (say 2.5%) and adding it to an index such as the 12-Month Treasury Average (MTA) which sits around 1.3%. This gives you a “fully indexed rate” of 3.8% today.
All of the payment options are then computed on this fully indexed rate. Any portion of your payment that does not cover the minimum interest is called “deferred interest” and is added to your loan balance each month. In other words, it negatively amortizes most of the time depending on where rates & margins are.
In our example, the Interest Only payment is $950 which is less than the 1% payment option offered. This means with the 1% payment at $965 per month on a $300,000 loan we are actually paying some principal down each month!
Call us for a personalized explanation and a review to see whether this loan is right for you, it can work miracles.
This loan also has 3 other payment options: “Interest Only”, 30 year Principal & Interest and a 15 year P & I. The way all 4 payments are computed is by taking a predetermined margin (say 2.5%) and adding it to an index such as the 12-Month Treasury Average (MTA) which sits around 1.3%. This gives you a “fully indexed rate” of 3.8% today.
All of the payment options are then computed on this fully indexed rate. Any portion of your payment that does not cover the minimum interest is called “deferred interest” and is added to your loan balance each month. In other words, it negatively amortizes most of the time depending on where rates & margins are.
In our example, the Interest Only payment is $950 which is less than the 1% payment option offered. This means with the 1% payment at $965 per month on a $300,000 loan we are actually paying some principal down each month!
Call us for a personalized explanation and a review to see whether this loan is right for you, it can work miracles.