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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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing - What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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