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Option Arm loan

What is an Option Arm loan and does it have any advantages/disadvantages?  

  • March 07 2011 - Jacksonville
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Answers (5)

Profile picture for Clearpoint
Are these even available any longer?  There are a lot of analogies for an option arm, none of which are appropriate for a post.
  • March 09 2011
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Advantage...Choose payment

Disadvantages..too many to name!  Like Rudi I thought these went by the way of the dinasour!
  • March 09 2011
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Profile picture for blue screen exile
The "intent" of those loans was for self employed people whose income varies substantially from month to month, but who on average have a decent income and are diligent enough to pay down their loan balances when the money comes in, such as movie actors.

If you have that kind of variable income, and the diligence to discipline yourself for the payments, they can be helpful, but they were often marketed to people with low income that shouldn't have been borrowing as much in the first place.

Using the wrong product for the wrong purpose is never a good idea.  And even for the self-employed, someone that has the discipline to pay down loan balances when the money comes in also has the discipline to have a reserve to cover the lean months.
  • March 08 2011
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Brian explained the product well. The height of these loans ended in 2007. Countrywide and WAMu were really big players. I didn't think any lender was still offering them.

Happy funding, Rudi
  • March 07 2011
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An option ARM is what some people also call the "Pick a payment" loan. You would have 4 payment options every month...

1) Minimum payment (a percentage of the loan amount)
2) 30 year fixed payment
3) 15 year fixed payment
4) Interest only loan

This was the hot product back in 04 05 ish...

The advantage is that you have the flexibility to decide what your payment is going to be in that particular month. If you have something come up where you cant affored the 15 or the 30 year payment, you can fall back on the interest only or the minimum payment (minimum is always the lowest)

The problem is that most people, when given the option, will find reasons to need to pay the minimum payment every month. That payment does not cover all of the interest due that month and the interest not paid is added to the principal balance of the loan. You can start out with a $100,000 mortgage and when you try to sell, it could be up to $125,000  or $130,000 if you are only making the minimum payment.

I would stay far far away from an option arm if I were you,
  • March 07 2011
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