PayOption Arm vs 5/1 Interest Only LIBOR ARM

I appologize if this has been posted before… There doesn’t seem to be a search function on this forum. (Unless it’s hiding from me)

I’m about to refi my house in South Jersey. I have 2 goals in mind, 1. to lower my payments and 2. score some cash. I’m currently talking to Countrywide and I believe I’m going to go with them as I’ve had horrible results with Wells Fargo (not to name names ;))

Currently I have a 5 year ARM at 5.375% (with WF). I planned on going with another 5 Year ARM, but Interest only. I talked to someone at Countrywide and I wanted a better Interest Rate, so we came up with me paying out 1 + 5/8 points to bring the rate to 5% even, which all said and done would leave my with 30k in pocket, as well as paying $200 less a month.

Today I spoke with another person at CountryWide and he recommended a Pay Option Arm instead. (I don’t plan on staying in the house more that 3-4 years) I don’t know anything about this, and I’ve been reading up on it a bit, but I’m young and dumb, and don’t understand a lot about the Margins and Indexes and the 7.5% CAP, however, from what it seems, if I stick with a minimum payment, I will actually be saving about $400 a month.

I’m confused as what to do… I don’t like the sounds of the payment changing yearly, however I do like the sounds of picking your payment.

Any advice would be greatly appreciated.

Just be aware when you make that min payment your only paying down part of the interest that’s accruing each month, as opposed to all of the interest with an int. only payment.

If your main concern is a low payment and cashflow then the option are might be ok as long as you are in an appreciating market.

Another thing to keep in mind is that most loans allow larger payments if you so choose as long as you notify them in writing that you are going to do so. So if you have an interest only loan then when you have the extra money then just pay the principal down. Also the Pay option arm depending on the lender can be set up on differant indexes the LIBOR is not a good one right now. It is a leading indicator index and therefore is very high right now. The COFI CODI or COSI would be better choices right now as they 6 mo to a year lagging indexes so they are riding the lower rates that we enjoyed a few months ago. Also you know where they are going since they are lagging so you can plan accordingly. Only certain lenders offer those indexes though. I know of several if you are interested.

My first mortgage 3 years ago, I was paying $250 towards the principal, but after 1.5 years of that, I didn’t notice much of a difference.

I am interested in the other lenders, even though countrywide already did a credit check. (My score was 660)

Here’s the current breakdown on my PayOption Arm

Loan Amount 160,000
Index 3.1%
Margin 2.125&
Start Rate 1.75%
Start Term 3 months
Index Type MTA

Min Payment $571.59
15 Yr Payment $1287.49
30 Yr Payment $880.96
Interest Only Payment $695.55

I could of course buy down the rate. Doing the math, it made since to pay the 1.5/8 points to drop the 5/1ARM to 5%, but I’m not sure with the PayOption.


There is a search function - it’s on the main Forum page at the top middle (with the magnifying glass icon)…or you can use this link:;action=search

Keith (wearing my Modertor hat!)


Thanks, I was looking in the forums themselves, not in the root. Still, not alot came up when I searched for PayOption. Is there another name for this type of loan?


Pick a pay

Pick a pay

??? I don’t understand.

Anyway, I just called WF to inquire about this PayOption deal, and the rep i spoke with said that it’s crap. (Not that I trust WF) But to hear someone else (as large as they are) say that they don’t offer such a loan basically answers my question.

I believe I’ll pay my 1 5/8 points and stick with a 5% Interest only loan.

Ofcourse he’s gonna say that! He wants you to go with his loan. One of the best reps Ive seen out there actually quite Wells and went over to Countrywide. Wells Fargo’s 5yr IO is the only agressive program they have goin for them.

Everyone offers the option arm, Countrywide, Wash. Mutual, First Federal Bank, World Savings, just to name a few. The option arm is a sophisticated loan program that is of benefit to people that understand leveraging of their funds and making their money work for them.

After researching, I’ve found that the PayOption ARM interest only payment fluxuates monthly as per the fully indexed rate.

This is kinda scary to me, I’m not a forecaster by any means, but it seems that the rates are at a steady climb. When I spoke with my rep at countrywide, he was sure to emphasize that the interest rates are NOT going anywhere anytime soon. I instantly thought that was kinda weird.

I wrote him a few more questions last night, I will include them here. When he gets back to me I will make my decision.

1.) PayOption ARM vs 5-1 ARM: Closing cost difference. You mentioned
today over the phone that the PayOption ARM consists of almost no closing
costs. Can you be more specific on this? What would my estimated (or
accurate if you can) closing costs be? What would they be for the 5-1ARM?
What would be the difference?

2.) Reguarding the PayOption ARM: Why isn’t the start rate 1.00%? It
should be for an Owner Occupied, right?

3.) Reguarding the 5-1 ARM: The gentleman I spoke with last week said he
could lock me in on a 5.00% rate giving that I pay exactully 1.5/8 points.
This is still possiable, correct?

4.) Is the PayOption ARM fixed in anyway? Meaning that I understood that
my minimum monthly payment will go up ONLY $43 every year. But what about
the Interest only payment. I don’t care about the minimum payment because
I will never pay that as the negitive am’s are a major no-no as far as I’m
concerned. Will the Interest only payment change? If Yes, How so, when?
and does it apply to the 7.5% cap as well?

5.) Do either of these loans include a Pre-Payment Penalty? I noticed on
the FAQ that the 5/1ARM does NOT allow for Pre-Pay Penaltys, and that the
PayOption allows for one. So would I be hit with one or not if I chose
the PayOption

6.) What index is the 3.100% based on? LIBOR? COFI seems to be doing
better right now. What would be the difference in payments.


I do a lot of PayOption ARMs and if you want to keep your current PayOption, you have a good one- your margin is low, and the MTA index is relatively stable- it is a 12 month average, so tends to move slower- good in a rising interest rate environment, bad in a lowering interest rate environment.

when you say slower… Exactully how so? My concerns are that one month my interest only payment will be $670ish, and the next month, or even a year later it will be up to $850ish. I don’t like the sounds of that, but do you think that is possiable?

Well, it is impossible to predict. If the market skyrockets, of course the interest only payment would go up faster. If the MTA just moves gradually higher as it has been, the increase shouldn’t be dramatic.

Another consideration is how much equity you have. Many of the investors that I work with look at these loans as long term cash outs- they have 20 or 30% equity, so they are not concerned if the balance goes up because they want the monthly cash for other deals.

Well, I owe 127,000 on the house, but it will probally appraise around 200,000+

I’m looking to pull 30k out, and roll the closings into the loan around 160,000

Here is the image he sent me yesterday.