1% Interest Rates… For Real?
The Option ARM, named by the industry leader, Washington Mutual, has become a key niche product in the mortgage industry. Unfortunately, it’s the most misrepresented product as well. Forget about what those adds say. The rate is a teaser. It only lasts for 1-3 months. After that, the rate goes up. Many borrowers get confused because the minimum payment does not go up for a year. This is different from the rate however. As soon as the rate goes up, the minimum payment no longer is enough to pay the interest on your loan. Every month you make the minimum payment, your loan amount goes up! Still, this program has many advantages for the right customer.
Option ARMs offer borrowers flexibility when qualifying for a loan, and puts them in control of their monthly finances. This product gives borrowers up to four payment options each month:
Minimum payment: The smallest payment you can make. It does not cover the interest due for the month and you loan amount goes up every time you make this payment. Generally, this payment changes annually and is calculated using the initial interest rate for the first 12 months. After that, the minimum payment is usually recalculated based on the outstanding principal balance, remaining loan term and prevailing interest rate. A payment cap limits how much this payment can increase or decrease each year.
Interest-only payment: Keeps payments manageable and allows you to break even on the loan. You do not pay any of the principal off, but you principal does not go up either.
Fully amortized payment: This is the payment that’s similar to a tradition 30yr loan. It covers the interest and pays down the principal. It’s calculated each month based on the prior month’s interest rate, loan balance and remaining loan term.
15-year payment: This payment let’s you pay off the loan “twice as fast” as the 30yr. In reality, this is a good payment to use when times are good in order to make up for the times when you made the minimum, or interest only payment.