Get Total Control Over Monthly Payments

By: Gabriel B. Avalos

Option ARMs are a powerful financial tool that put you in control of your finances and cash flow. The strength is in the ability to choose your desired payment option every month. With an Option ARM, you decide how much to pay each time you send a payment:

  • Minimum Payment
  • Interest Only Payment
  • 30 Year Amortized Payment
  • 15 Year Amortized Payment

Option ARMs are quickly becoming the most popular ARM product available today, and are known by many names and variations: Pay Option ARMs, Pick-A-Payment Loans, 1-Month Option ARMs, CashFlow Option Loans, Pay Option Loans, etc.

The Most Common Concerns About Option ARMs is Deferred Interest:

What is deferred interest?

With an options loan you may have payments that may not cover all the interest due that month on your mortgage. When that happens, you “defer" the extra interest by adding it to the outstanding balance of your mortgage.

Deferred interest may occur if:

  • You have a mortgage with a special LOW INITIAL INTEREST RATE.
  • The ANNUAL PAYMENT CAP on your mortgage goes into effect.
  • The INDEX that determines the interest rate on your loan goes up.

However, the factors that cause deferred interest are also the factors that make this loan affordable:

  • The low start rate allows payments to remain low during the critical first few years of home ownership.
  • Payment Caps limit how high your interest rate can actually increase each year.

    Your payments may drop if the interest rate index falls.
  • Loans tied to the (COFI) Cost of Funds Index have proven to be more economical that fixed-rate mortgages.

How will I ever pay off my loan if deferred interest is causing my balance to go up?

While there are occasions when deferred interest can add to your loan balance, there are many other periods when your loan pays off faster than usual. Over time, these periods of deferred interest and faster payoff offset each other. Don’t forget if you are selling your home, you will have appreciation that will also offset any higher balance concerns.

Must I have deferred interest on my loan?

The simple answer is NO. This loan is controlled by YOU. With the four payment options available, you decide if you want to have deferred interest in any given month. These payment choices are clearly listed on the payment statement each month. You can, if you choose, pay all interest as it accrues, thereby avoiding deferred interest being added to your loan balance.

Electing not to pay deferred interest will mean more cash in your pocket. Choosing this option makes financial sense if it helps you:

  • To pay off higher interest rate debts
  • Use the cash for new carpeting
  • Use the cash for remodeling
  • Use the extra cash to invest
  • Use the extra cash landscaping
  • Invest your savings in other profitable alternatives

Pay It Or Don’t Pay It – Either Way YOU WIN! 

The truth is, mortgages cannot be isolated in today’s environmentComputer Technology Articles, but must be integrated with the rest of your financial planning process in order to be most effective.

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