What's the difference between OPTION ARM & INTEREST ONLY loans?

Question

Give concrete examples of a loan and show the advantages of each.,

Answer 1

Pay option arm is an adjustable rate note. Most have a low intro rate and then will quickly adjust up. This type of loan gives you the option of payments. Minimum payment(negative amortization) Interest only(nothing to principal) 15 year payment(if paid always will pay of in 15 years) and a 30 year note. It gives you the option of paying what you want. The note will recast every 5 years per the unpaid balance of the note. This note allows someone to buy more home than they can afford.
I am a mortgage banker in TN & KY
Interest only notes are either a call note (balloon) almost always a 30 year note balance due in 15 years OR a note that recast every 5 years usually to a max of 10 years at that point you must pay the piper or refi the home. Again a note like this allows you to buy more home than you can afford. The ONLY time I would recommend these notes is if some one is buying way under market value to live in and fix up then sell high.

Answer 2

ARM's are Adjustible rate Mortgages which mean that the interest rates can flucuate, both up and down. Over the long term an ARM can become much more expensive. They are attractive in times of relatively moderate but stable, interest rates as the interest rates are typically lower than fixed rate loans. Options often are for a conversion to a fixed rate if rates change considerably.
An Interest only loan is one where the payments being made are Interest only, with nothing of the principal being paid. These loans will always have a large (the entire principal amount) balloon payment due at maturity. The advantage of Interest only loans are in situations when a lower payment now is desired and where a refinace to a different type of loan is imminent, such as new construction loans which are converted to standard mortgages later on.