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What is an Option ARM Mortgage Home Loan
Mortgage - An option ARM allows you the option to pay as little as a 1% interest rate. As a result, the difference between your payment and the interest on your loan that month becomes negative. The option ARM gives you four payment choices each month (1%, interest only, 30 year fixed rate, 15 year fixed rate). The interest rate will adjust every month, depending on which index the loan is tied to. These loans are useful for people who have a lot of equity in their home and don't want to pay higher monthly costs, as well as investors, allowing them the flexibility to choose which payment to make every month.
One of the important feature of this type of loan is that the minimum payments are often fixed for each year for an initial term of up to 5 years. The minimum payment may rise each year a little (payment size increases of 7.5% are common) but remain the same for another year. For example, a minimum payment for year 1 may be $1,000 per month each month all year long. In year 2 the minimum payment for each month is $1,075 each month. This is a gradual increase in the minimum payment. The interest rate may fluctuate each month, which means you can't predict your negative amortization ahead of time.
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