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Refinance To An Option ARM Loan
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Many homeowners have found strong benefits to refinancing to a pay option ARM loan. These loans do have a downside so make sure that the mortgage agent that you work with fully explains how these loans work and whether such a loan would be right for your individual situation. Despite the risks involved, thousands upon thousands of homeowners have refinanced into these loans to take advantage of the flexibility and cash flow benefits that they offer.Many of the current stated income pay option programs have lower rates than the fixed rate stated income loans, due to liquidity problems in the market.
Many of the risks associated with Option ARM loans are to a large extent solved by using the newer Hybrid or Fixed Rate Pay Option minimum payment loans, which offer rates range from 1% to 4% for their minimum payments and have either their rate or payment fixed for 3, 5, 7, 10 or even 30 years.
The biggest risk with the option arm is the potential for negative amortization. Basically, this means that your loan balance can go up over time, rather than down. The reason this is possible is that there is a 'minimum payment' option, where you make a payment based on an interest rate that is lower than your real interest rate. When you do this, the difference in your interest payments between the two different interest rates is added to your loan balance.
One of the risks of a Pay Option ARM is that some of the payments are based on a 1-month adjustable rate. While the adjustments are relatively small this is still a feature to be aware of in any type of market.
Please make sure you ask your mortgage professional a lot of questions about the Pay Option ARM if you are not familiar with the loan, how it works, or the risks and benefits of the loan. If you are still unclear about the Pay Option ARM loans after asking your Mortgage Professional and you are not satisfied with the information you have received, consult an outside source. These loans can provide great benefits to many consumers, but also they are not the right type of loan for everyone.
The pay option ARM programs require a great deal of financial responsibility for the borrowers. The money saved every month by making the minimum payment needs to be used for investment or debt pay off purposes. The money is not meant to go to items such as new cars, boats or other recreational items!
It's very important to understand that the minimum payment does not cover the interest on your option ARM. As a result, your balance owed increases each time you make a minimum payment. Also, your actual interest rate is adjusted each month and may go up or down depending upon the index it is based upon. Insist on a written explanation/disclosure from your mortgage professional before making a final decision.
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