payment option arm

Hi Aurelius,

Welcome to Mortgagefit discussion board.

This type of mortgage has a recalculation period which is normally after every five years. At that time borrowers payment gets recalculated, which is also termed as recast. The recast is done based on the remaining period of the mortgage. Suppose, you have a thirty year loan and 5 yr. period is going to end then at this time your payments will get recalculated for the rest twenty five years.

The payment cap which is set for your loan will not be applicable to this adjustment & if in case your balance has risen or the rates have increased more rapidly than the payments you have made in these five years then you could anticipate your payments to go up by quite a bit at this time.

The other thing you asked about option payments being ended by lender. Lender can do so if the principal balance crosses a set limit, let us say 125% or 110% of the original principal amount.

This example would make it clear. If you are making minimum payments on your mortgage which does not cover the total principal & interest due each month then there will be negative amortization. Now if the mortgage was for $200,000 and now the balance has increased to $250,000, 125% of $200,000 then lender would end the option payments. At this point your loan will get recalculated & you would be required to start paying principal & interest calculated based on remaining period of the loan.

Do let me know if you have any other questions.

Thanks
Blue

Payment Option ARMs are available in 3 Payment Types as follows:

1.) Fully Amortizing
2.) Interest Only
3.) Negative Amortization

The recast of a loan is done when you select Negative Amortization as your payment type.

If you are buying a property in New York mostly the Lender will reset a Cap till 110 % and for other states the cap is of 115 % - 125 % depends.

In current scenario Lenders are also coming up with Balloon ARM Loans with Payment Option feature so its getting quiet interesting.

For Example : Check out the Deutsche Bank - ALT PayOption ARM.

Regards

Sagar

i have a payment option arm with a payment cap of 8.5%, what that means?

The payment cap limits the monthly payment adjustments that can occur. This cap limits the increase in your payments to a certain percentage of the previous payment.

If your monthly payments are $1000 then because of the payment cap your monthly payments cannot increase more than $1085 (8.5% of $1000)

Miller

Hi,

Caps are nothing but a notification provided by a Lender about how a Rate of Interest can go high during the Loan Tenure.

Products having CAPS usually have a bit high rate of interest.

There are 2 types of CAPS, the one which u have mentioned is known as
" THE LIFE CAP ".

The other CAP has 3 Levels namely :

1.) Initial Interest Cap
2.) Subsequent Cap
3.) Lifetime Cap.

For example :

Product Name : 5/1 YR LIBOR ARM 30 YR with 5/2/5 CAP.

5 - In the initial or first adjustment period after the 5 year initial fixed
period, the rate can adjust a maximum of either 5 Percent up or
down.

2 - At the subsequent annual adjustment, the rate can only adjust
2 Percent up or down.

5 - The lifetime cap restricts the ARM rate increase to 5% over the
initial rate during the loan term.


Regards

Sagar

That's good information Sagar. But I would differ with you in the sense that there are 3 types of ARM caps and not levels actually. And, the limit up to which rates can adjust will vary from one lender to another.

Hi Sara,

You are right I just wanted the person who asked this question to be comfortable so I used the term " LEVELS ".

Regards

Sagar