Pay Option ARM

This loan program will give you an ability to make lowest possible payment if necessary. This is an ideal solution for investors who for a certain period might have a vacant property; therefore you will make a minimum payment. Once your property is rented, that you can either make Interest Only Payment, 30 - year fixed payment or 15 year fixed payment.

Pay Option ARM in a new loan program allowing customers to choose from up to 4 different payments. This loan program is part of an ARM, but with added flexibility of making one of the 4 payments. Interest sensitive Loan.

Your initial start rate varies from 1.000% to anywhere around 4.000%. The initial start rate is held only for one month, after that interest rate changes monthly.

4 major choices are:

1) Minimum payment: For the first 12 months interest rate is calculated using the start rate, after that interest rate is calculated annually.

Example:

Loan Amount: $200,000.00
Initial Rate: 1.25%
Index: 3.326 (MTA as of October 2005)
Margin: 2.75%
Payment Cap: 7.5%
Fully Indexed Rate: 6.076% (index + margin )

The Option ARM's 7.5% payment cap limits how much the payment can increase or decrease each year, except for every fifth year (beginning in the 10th year on certain programs), when the cap does not apply. In the event your balance exceeds your original loan amount by 125% (110% in N.Y.), the payment amount may change more frequently without regard to the payment cap.

Because you are paying "minimum payment" this option will defer a payment of an interest which will be added to your balance.

Minimum Payment Adjustment Period: The minimum payment is usually set to 12 months, unless negative amortization limit is reached.

Minimum Payment Cap: This is a limit on how much the minimum payment can change. Your payment cap will be 7.5% for the first five years. On your next payment due, your minimum payment cannot increase or decrease more than 7.5%. If it does than a loan is recast.

Recast (Recasting) or re-calculating your loan is a way of limiting negative amortization (neg-am). Option ARM's recast every 5 years. When the loan is recast, the payment required to fully amortize the loan over the remaining term becomes the new minimum payment.

2) Interest Only Payment: With Interest Only you will avoid deferred interest, because you are paying principal and interest. If you pay only Interest or Principal your loan balance will increase because you are adding either principal payment or interest payment to your loan balance, thus leading towards Neg-Am Loan.

Your payment may change on monthly basis based on ARM index (LIBOR,COFI,MTA).

Minimum Payment and Interest Only Loan is based on: 

a) Index: CMT-MTA-COFI-CODI-COSI-LIBOR-Prime Rate.

b) Margin: Is given to you by your lender, and it is the difference between the index rate and the interest charged to the borrower

For example 5/1 ARM. This loan is fixed for 5 years after which in 6th year it becomes an adjustable loan.  Your loan officer will tell you what your index is and what your margin is. Usually 5/1 arm is tied to 1-year treasury index and margin is around 2.00%-3.00%

Your index + margin = Fully Index rate . Your new note rate (interest rate) after 5th year.

What about the 6th year? What would your payment be?

Let's say that your loan officer told you that your margin is 2.5% with 1 year treasury index. You will have to look up 1 year treasury index for a specific month.

1 year treasury as of Oct.2005 is 4.18, and you know that your margin is 2.5%. Therefore you new interest rate is 1 year treasury 4.18% (index) + 2.5% (margin) = 6.68% for the beginning of 6th year.

Index rate are move on monthly basis, therefore your payment may fluctuate each month. In most cases banks wills end you a statement advising you that your rate will change.

c) To protect consumers from high index rates, lenders implemented a CAPS.

An example of this is a 2/6 cap, which allows the interest rate on your ARM loan to go up or down by no more than two percent every adjustment period, and has a total limit of six percent for cumulative changes. Therefore a 2/6 cap on a 5% ARM will allow a maximum rate (6 + 5%) of no more than 11%.

In some cases you will see 2/2/6, which means 2% adjustment with 2 year prepayment penalty and total of six percent of cumulative changes.

3) Fully Amortizing 30-Year Payment: It's calculated each month based on the prior month's interest rate, loan balance and remaining loan term. When you choose this option, you reduce your principal and pay off your loan on schedule.

4) Fully Amortizing 15-Year Payment: It is calculated from the first payment due date.