Are you currently receiving disabililty benefits from the VA? If so, you would be exempt from the VA's funding fee. Make sure to ask your lender to request this exemption from the VA.
You received a Pay-Option ARM. Your payment that you made was insufficient to cover the interest, so the shortfall was added to the balance. Each year your principal balance will continue to go up. This should have been adequately explained to you by your original lender and by law you were required to sign an ARM disclosure. If any of this seems unfamiliar, if you would like to send me a copy of your note, I could go over it at no charge and see if we can't figure this out for you.[content removed by moderator for being self-promotional]