Option ARM Loans - Making Adjustable Rate Mortgages Work For You

How does one benefit by getting an ARM style loan and what is an Option ARM Loan? These are two questions that many people find themselves asking when they look into get a new loan for their home.

Most loan officers and mortgage brokers tend to be less than forthcoming with the short falls of these types of loans. They talk about all the benefits and little if any of the negative effect of the ARM loan.

An ARM Loan is a sub prime loan. As its name implies, an adjustable rate mortgage (ARM) is one in which the rate changes (adjusts) on a specified schedule after an initial “fixed” period.

With an ARM loan your initial rate is usually much lower than the market rate, so you will usually start out with a better rate than with any “fixed rate” type of loan. Although somewhat riskier than a fixed rate mortgage, an ARM may benefit you if you have certain needs or find yourself in certain circumstances. In other circumstances, you may be better off with a fixed rate or other type of mortgage.

There are different types of ARM Loans. The Option ARM Loan usually offers you 3 to 4 different payment options. You can pay a minimum payment that is usually below your interest, you can pay an interest only payment or you can pay the full amount. The Option ARM loan have a fixed rate on the payment options for the first year, then it will increase a certain percentage every year thereafter. They usually do this for 5 years then you will get all of the loan put on you. If you are paying less then the interest for 5 years you will have all the unpaid interest plus all the unpaid principal add on to your loan. This can be a big shock to the borrower when the rate and payment increases and they find out they owe more after 5 years then they did when they borrowed the money.

This style of loan can be very risky. You may end up stuck with a loan that is bigger than the value of your house. In such a case you would not be able to refinance your home and get a better loan. This does not happen often. The increase may be several thousands of dollars, but over a 5 year period of time real estate values should increase as well and if you have maintained your home it should value out just fine.

I would suggest the Option ARM Loan only in a few circumstances. If you are planning on selling your home in a few years and you know you will be making a good profit off of it when you sell it then the Option ARM Loan is a loan program you should look into. This will save you a lot of money every month on your mortgage payment. You can use this to make improvements to your house and sell it for a bigger profit.

Another reason to use this style of loan is if you are having financial troubles. Many people get over extended with their credit these days. By refinancing your home with an Option ARM Loan you can use the extra money you save to payoff your higher interest credit card payments and get rid of that debt. This will improve your credit rating and lower all of your monthly payments. If you choose to do this I would suggest setting a budget that will get your high interest rate debt paid off within 3 to 4 years. Then you will have a year to find a good solid loan and refinance your home.

No matter what you do, if you choose an ARM Loan you should plan on refinancing in no latter than 4 years. This is a short term fix for problems that you have. This is not a long term fix.

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