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Option ARMs, or sometimes called option power ARMs, have become a popular type of mortgage for borrowers over the last
few months. It is a specific variable rate mortgage that starts with an exceedingly low
rate and adjusts in very short intervals. Most of the advertised loans in various
publications quote these types of loans to draw potential borrowers to their companies.
There are a few selling points that mortgage brokers like to point out:
All of these factors make a strong case for the Option ARM. However, borrowers should also be aware of the potential pitfalls associated with this loan. First, Option ARMS adjust very frequently, usually every few months (and sometimes every month). Each adjustment will have a new interest rate. In times of increasing interest rates, borrowers may find themselves watching their interest rate climb. Second, there are various types of payment options with this mortgage. Borrowers usually have the choice of four payment options. The first two are a standard 30 or 15 year mortgage payment, with principal and interest. The third is to pay the interest only and the fourth is to pay the minimum payment. These last two can provide a few challenges later in the loan's life. Paying the interest only will never pay down the mortgage balance. Paying the minimum payment, which DOES NOT cover the interest portion of the mortgage, will make your loan balance grow. Couple this payment option with rising interest rates and borrowers could see a significant rise in their mortgage balance in a very short period of time.
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