Are Option ARMS the same as a “Pay Option”??
Also, are Option ARMS usually fixed at the 1% or so for the first 5 years? Or do they adjust monthly from day one?
Same thing, there are various names for it around the industry as well as different rate & payment terms. Each lender has disclosures about their particular Option ARM, when it adjusts, how long the fixed payment amount is good for and what determines when/what it will change to, the index it’s based on, how long your note rate is fixed in for and what the margin is when it will adjust, etc.
The 1% rate refers to the minimum payment rate - not the interest rate the borrower is borrowing their mortgage balance at, are you familiar with Option ARMs and their features?
Option ARMS will not be around much longer. Investors in the secondary markets are starting to shy away from them.
IMHO. Option ARMS are bad for the consumer…but if they really want one you can mike a nice commission.
Option Arms, Pay Option, Negative Amortization Arms, Pick a Payment, Cash flow Arms, Personlly tailored Arms are all fundamentally the same… They allow you to generate cash flow for a few years by freeing up your monthly payment and not paying off the interest.
The three main indexes that Option Arm loans are tied to are the Cost of Funds Index (COFI), 1-Month Libor (London Interbank Offering Rate) and the Monthly Treasury Average (MTA).
Have you considered the min payment advantage in an increasing interest rate market? http://www.jumboinvestments.com/uploads/WFL032_minpayadv.pdf
START RATE EXPLANATION
The 1.00% *“Starting Rate” is a Principal and Interest Rate for the first month of your loan. A “Teaser Rate” is another name for the “Start Rate.” The purpose of the “Start Rate” is to establish the “Minimum payment” (or the lowest payment option) for the next eleven (11) months. Beginning in year two (2) the yearly payment cap will apply to the “Minimum” payment option. The Minimum payments are guaranteed not to go higher or lower than 7.5% of the prior year Minimum payment, for the first five (5) years of the loan, regardless of the movement of the Index.
If you have a higher “Starting Rate” the “Minimum payment” option will go away faster as you will hit the “Scheduled payment” (Index + Margin X outstanding loan balance) sooner (or the payment required to still pay your mtg. off in 30 yrs. or less.) Moreover, if you continue to make the “Fully Indexed” payment (Index + Margin) again called the “Scheduled payment” option every month, your loan balance should always decline regardless of the movement of the Index. This is because your new loan balance will be lower each month, and this lower balance will then be re-calculated by the new monthly Index + Margin. Hence, the yearly 7.5% Payment Cap most likely will never be enforced or “come into play”, because your outstanding loan balance will always be declining even if the Index is increasing. However, the yearly 7.5% Payment Cap is in force and can be applied to the Scheduled payment option for 30 years (if the Index were to rapidly increase.) This has never happened since the inception of the MTA Index and COFI program.