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What is Payment Option ARM?

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  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 20 July 2018
  • Copyright Protected:
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The payment option ARM is a mortgage offered by some mortgage brokers as a way to promote flexibility in the mortgage payment process. With this kind of loan, a homeowner will be able to choose from a number of different payment options every month. The payment option ARM is known as a mortgage that provides negative amortization and carries with it a fair amount of risk. This type of mortgage is preferred by many home buyers because it allows them to find a payment within their budget even if they have a flexible income.

The payment option ARM provides the homeowner with a few options to choose from when it comes to making a monthly payment. Typically, the homeowner can choose between making a full mortgage payment, an interest-only mortgage payment, or a minimum payment that is actually less than the amount of money accruing in interest. Every month, the homeowner can decide whether to pay a full mortgage payment or if a smaller payment would be better.

The amount of money not paid in interest every month is added to the outstanding balance of the loan. This creates a scenario where the loan is actually growing. This concept is called negative amortization. It has caused serious problems for some homeowners who did not make the proper plans for paying off the loan.

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After a certain amount of time, the loan is re-amortized. This means that the loan payment switches to a fixed payment based on how much money is left to pay off. If the individual elected to make minimum payments for a certain amount time, this could result in a substantially larger payment. Many people have been caught off guard at this point and end up getting into a mortgage payment they cannot afford. This makes the payment option ARM one of the riskiest mortgages on the market if the buyer gets into it without full knowledge of what could happen.

At the same time, the payment option ARM can also be helpful to certain home buyers. This type of mortgage provides ultimate flexibility when it comes to making a mortgage payment. For individuals who are self-employed or have flexible incomes, this type of mortgage can be very beneficial.

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