Can someone explain an Option ARM (Adjustable Rate Mortgage) to me?

Question

I am just trying to learn about how they work because i just started a career as a loan officer and i dont understand them fully. Thanks

Answer 1

They are very difficult to understand but with reading you can not only understand them but help someone else understand them as well. Try this website I used it when I first got into the business 2 years ago. www.mortgage-x.com

Answer 2

The Option ARM starts at a very low rate, 1% is what I've seen, and adjusts to a market rate after a month, although the payments stay fixed at what would pay the initial interest rate.

Borrow 100K, and that means the initial interest is about $83 per month, so the payments for the first year are just $83 per month (plus escrow, if any).

However, at the end of the first year, the Borrower would owe the Principal plus the unpaid interest. With a real rate of 6%, that would mean they'd owe about $105,000, and the new payments would be based on that balance and the current interest rate.

It is a good deal for people in very specific circumstances. People who plan to turn property over quickly, after adding value to it, or people who have a legitimate expectation of a higher income soon, from a trust that's terminating, sale of movie rights, getting out of medical school, or people that are in the process of selling another home that is vacant.

It can also be a trap for the unwary, so make sure YOU understand it, and be sure your clients understand it. KNOW:

When does the interest rate change? When does the payment change? What are the maximums those can be? Are there times (like every 5th year) that a specific amortization MUST be used? What about prepayment penalties?

It's a good tool, but not for all people.

Oh, one other thing you need to know as a LO on this kind of thing. The Title Insurance face amount will be the MAXIMUM the loan can go to, so you need to have that sorted out before you give a Good Faith Estimate. In my example above, you'd have to have a title policy for $105k, which is going to cost a little more than one for $100k.

Answer 3

Pay option arm is an adjustable rate note that is tied to an index. The client has 4 options monthly to pay the note
30 year amortization
15 year amortization
interest only
Negative amortization
The loan recast every 5 years on the unpaid principal
At some point typically on the 10 year anniversary will go to a straight 20 year arm
I am a loan officer in Tennessee

Answer 4

There are no cons.. refinance now, her rate & payment will only keep going up. What she got is called a "2yr ARM" (adjustible rate mortgage), it was a loan just to get her in the house, at a reasonable rate & payment. But now the Fixed part is over and the Adjustable part is starting, and won't stop. Need To Know: 1) her LTV (loan to value), how much dose she owe (ex 100K) compaired to, how much it's worth (ex 110K). 2) what's her credit score (it should be better now after 2yrs, if she made on time payments) 3) Income; stedy job? (hasn't quit, been layoff, or different type of job). Now's a good time to Refi, it's the off season (home sales). Rates will go up starting in March (spring)and won't start coming down until end of Oct. (fall).

Answer 5

not sure how much i can help with this one. i got the run around from the bank. the basic idea is you start out with a fixed rate for 2, 3 or 4 years. However many they decide. However, at the end of that period, that rate will adjust according to the current rates at the time. You could be fixed at 6% for a few years and at the end it could jump up to 7% or even drop depending on the rates at the time.

Answer 6

options arm loans are loans with fixed payment (min. payment options) ,but the rate on the loan change monthly ( after 1mth or 3 mth). minimum payment is changing every 12 mth and increase 7.5% of the payment and this happen for about 6 years or if negative amortization will reach 110-115% of the original loan amount. after that , the lender will recast this loan ,so the borrower can pay his loan for the remaining term of the loan.
the easier way to explain this program is like I'm giving you the car, your payment is $500, but you can pay me $100 and pay me later rest of the money after you sell your car.hope this help.

Answer 7

Loan officers are worse than used car salesman. Its a scum bag profession. I pay cash for all my real estate deals because I hate dealing with you scum-bags! Don't think your in a great profession - most people view you as a scum-bag.

Answer 8

Do not get inot this loan. I am a mortgage consultant and would be glad to offer you some advice. Please call me at 1-800-766-5185 ext 4439 . My name is Tim

Answer 9

Here is a comprehensive explanation, http://www.choicefinance.net/mta-option-arm.htm