Option ARMS - Flexible Loans But Know What You Are Getting

easy Step Funding tempts prospective borrowers with this teaser:

"Why pay more when you can pay less. By refinancing with a Pick Your Payment Loan also known as an option arm you get 4 possible payment options every month with out it having any negative affect to your credit. Get the flexibility of picking which option is right for you every month."

They are promoting the option ARM, an adjustable-rate mortgage that gives the borrower four payment choices each month. You can pay at a 15-year payoff schedule, the largest payment you can make; at a 30-year payoff schedule, a lower payment; an interest-only 30-year payoff schedule, a still lower payment or the smallest payment that does not cover the accrued interest for the month - but you owe more at the end of the month than at the beginning.

Option ARMS are appropriate for people with variable incomes who want to make small payments for a few months but have the means to play catch up with larger ones later. But if you consistently make small payments, your loan balance can grow and at some time in the future you will be required to make much larger monthly payments. And if interest rates rise, your future payments will balloon.

An option ARM gives the borrower lots of flexibility but for this benefit the borrower assumes the risk of larger monthly payments. And, if misapplied, the option ARM can lead to possible default on the loan if larger monthly payments become unaffordable.

As with any financial decision, let the buyer beware.

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Posted December 8, 2006.