Question by Bolder: Can anybody tell me what they think about Option ARM minimum payment plan for refinancing your mortgage is a g
What do you think? Trying to refinance to keep my home during my divorce? Is this smart or stupid?
Answer by amkornele
Depends on how disciplined you are about making your payments and managing your debt.
An option ARM allows you a choice of 4 mortgage payments each month.
For instance, you can choose a payment based on a 1.5% interest rate, an Interest only payment, a 15 year payment or a 30 year payment. In most cases, your interest rate will adjust every month.
The 1.5% interest rate is a “teaser rate”, not the actual interest rate being charged. In fact, you will be accruing interest that will not be paid in full by the lowest payment choice. It will be added to your balance and you will now have negative amortization. In other words, you may end up owing more on your mortgage than you originally borrowed.
This is a great loan for people who have variable income but are disciplined enough to make lump sum payments when times are good. That way you can avoid negative amortization but still have the flexibility of choosing the payment that works for you each month.
By the way: Most notes have a cap on how high the interest can go, both for changes AND the life of the loan.
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