Mortgage Loan: Option
Adjustable Rate Mortgages |
By Louie Latour |
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Option Adjustable Rate Mortgages are a useful financial tool for
financially savvy homeowners with a high tolerance for risk. When
these loans are abused they have the potential to financially ruin a
homeowner; here is what you need to know about these risky
Adjustable Rate Mortgages.
If you finance your home using a
traditional mortgage you will make one mortgage payment every month.
With an option mortgage you have four payment options available to
you. These payment options include: 30 year amortization, 15 year
amortization, interest only, and the optional minimum payment. The
optional payment does not cover the full amount of interest due for
that month; the payment amount typically accounts for two percent of
the interest due. These mortgages all come with variable interest
rates and the lender will adjust the interest rate at regular
intervals.
The option period of these mortgages only lasts
for a specific period of time, typically five years. At the end of
the option period the mortgage lender will convert the loan to a
fully amortized mortgage with a variable interest rate. Option
adjustable rate mortgages are useful for individuals that need to
make lower monthly payments for a short period of time.
Option adjustable rate mortgages have the potential to negatively
amortize themselves when you make the interest only or option
payments. Because the option payment does not cover all the interest
due in a particular month, the lender will add the unpaid interest
to your principal balance. This means your loan balance is actually
growing with time, hence the negative amortization. Interest only
adjustable rate mortgages also have the potential for negative
amortization and should be used with care. If you only pay the
minimum amount for five years you will see a significant increase in
your monthly payment and outstanding loan balance at the end of five
years.
Adjustable rate mortgages carry a significant amount
of risk for borrowers; option adjustable rate mortgages are even
more risky. To learn more about financing your home while minimizing
risk and avoiding common mistakes, register for a free mortgage
guidebook. |
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