The Principal Facts of Option ARM's and Interest-Only Mortgages Conforming Mortgages and Jumbo Loans - Two River Mortgage and Investment Information Source

Pay-Option ARMs

Also called; Option ARM's, Fixed Pay Option ARM's, MTA, COFI, CODI, Libor, Alternative Mortgage Transactions.

You must know your Margin and the Index

Are these mortgage loans dangerous? That depends upon the borrower. A mortgage program is nothing more than a tool. You could cut a board with a hammer and a screw driver but a saw works better.

You, the borrower, NEEDS TO FULLY UNDERSTAND all aspects of these loans before you even consider utilizing one of these programs.

I have used these programs for almost 20 years. I have had an MTA on one of my homes. Fully understanding this loan prior to making an application is essential. Do not rely on an entry level loan officer or any untrained individual to fully explain the mortgage program.

You will see these loans advertised as 1% - 2.45%. This is not the interest rate, but the basis for calculating the "minimum monthly payment".

There are a few variations of the Option ARM and the Fixed Pay Option ARM.

The Option ARM was originally designed for use by the higher net worth borrower. These are excellent programs for Stock Traders and others on Wall Street who receive large bonuses as a majority of their annual compensation.

Due to the recent surge in the real estate market, particularly on the east and West coasts, the Option ARM, the Fixed Pay and Alternative Mortgage Transactions have gone from being used by less that 1% in 2002 to over 12% of all loans originated in 2005.

In the Option ARM, the mortgage payments for the first 12 months will be calculated and fixed for the 12 month period by the "minimum monthly payment". The "minimum monthly payment" will increase 7.5% per year. The interest rate on this loan is completely independent from the "minimum monthly payment".

You must know your Margin. The interest rate will adjust monthly after the initial period (1 or 3 months). In the current interest rate environment the loan will almost certainly have Negative Amortization. Negative Amortization in when your payments occurs when you fail to meet a level sufficient to cover a payment at least equal to the minimum interest only payment. If you continued to have the negative amortization you could have a situation where you owe more money than you originally borrowed. Most of these loans have clauses that forbid the borrower from exceeding 110% - 125% of the original loan amount.

Option ARM's also have an interest only feature, however the interest only feature only applies when the fully indexed (margin plus index) interest only exceeds the "minimum monthly payment". The borrower will receive a monthly statement that details the payment options as they become available.

The benefits of the Option ARM's and Fixed Payment mortgage programs are the vast variations they in their flexible underwriting guidelines. A traditional mortgage program will limit a borrower to taking no more than $250,000 of cash out of their homes. Many pay option ARM's have no limits. Two River Mortgage & Investment had a borrower whose home was valued at almost $14,000,000 with no mortgage. Two River Mortgage & Investment utilized a Libor based Option ARM to allow the borrower to take $6,100,000 cash out of his home. This loan was a Stated Income Super Jumbo Mortgage.

Again, Option ARM's, Fixed Payment ARM's and all of the alternative mortgage transaction mortgage programs are tools. The borrower needs to educate themselves about the pros and cons of the specific mortgage program and the indexes the mortgage is based upon

Conventional or Conforming loans are called this because the loan amount 'conform' to the maximum loan amounts which may be purchased in the secondary market. The buyer of these loans is the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corp. (FHLMC, or Freddie Mac).

The old rule of thumb that you need to lower your Interest Rate by 2%, is more or less obsolete. For some people as little as a 1/2% drop in thier loan rate would be sufficient. This is a question with no definative answer. It is all relative. Foer some individuals a month savings of $100 is significant others need the savings to be higher. You must ask yourself if the monthly savings is significant to you.

Why should you consider an Interest Only Mortgage Loan? The short answer is the amount of money it will lower your monthly payment. Basically, it is intended to increase your monthly cash flow. Typically, an Interest Only Loan will have a payment about 26.5% less than a fully amortizing mortgage of the same interest rate. Since most Interest Only loans are based upon A.R.M.'s the rates are usually well below a comparable 30 Year Fixed Mortgages further reducing the monthly payment. Some Interest Only mortgages recalculate you monthly payment based upon your outstanding balance. This allows you to have additional principal payments effect your monthly payment immediately. Ask yourself, if only the interest portion of a mortgage payment (principal and interest) is tax deductible why do I want to pay down the principle portion of my mortgage? Amortizing a mortgage will gradually diminish my tax deduction. Could I better invest the principle portion of my mortgage payment? At what rate is my property appreciating? How long will I really live in this home?