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Minimum Payment Calculation for Option ARM
Moderators: Mortgage-X

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   Types of Loan Programs-> Pay Option ARM, Pick-a-Payment, Cash Flow LoanMessage format
 
jenny2850
Posted 5/3/2006 9:50 AM (#1030)
Subject: Minimum Payment Calculation for Option ARM
Hi,

My agent says that i should go for Option ARM loan. He didn't give much detail but said that during the teaser period (which will be of 1 month)I'll be given a teaser rate which will be much lower than the Fully Index rate and that rate will be used to calculate the Minimum Payment. But during this teaser period i won't have the option of making any of the other payments. But to calculate the other 3 options they are using the Fully Index rate.
So basically if i opt for this, this will increase my Loan Balnce and make it more than the Original Principal balance becauae of Negative Amortization.
Now is this legally possible as they are forcing me to go to negative amortization by not giving me the other 3 options during the teaser period.

:(
paulm
Posted 5/4/2006 8:39 PM (#1036 - in reply to #1030)
Subject: RE: Minimum Payment Calculation for Option ARM
Hi Jenny,

[QUOTE]jenny2850 - 5/3/2006 6:50 AM

Hi,

My agent says that i should go for Option ARM loan. He didn't give much detail[/QUOTE]

You should probably talk to a qualified mortgage broker or banker regarding one of these loans. If your agent isn't giving you much details, then he is either hiding them from you or more likely, he doesn't understand the loan.

[QUOTE]but said that during the teaser period (which will be of 1 month)I'll be given a teaser rate which will be much lower than the Fully Index rate and that rate will be used to calculate the Minimum Payment. [/QUOTE]

One of two things can happen here. Many Option ARM lenders actually charge the minimum payment rate for the first month as a teaser. One of the reasons is that the software most of us use, doesn't handle these loans very well. In the second month it becomes the minimum payment rate or start rate. Your minimum payment will be based on this rate and fixed for usually 1 year. Each year after that, the minimum payment will increase 7.5%.

[QUOTE]But during this teaser period i won't have the option of making any of the other payments. [/QUOTE]

That doesn't make any sense. They can't force you to take negative amortization. What may happen is that may use the minimum payment rate to calculate the prepaid interest. If this happens, it would create initial negative amortization. You could either request that the lender take the full interest only payment as prepaid interest or you can just pay that additional interest on your first payment.

[QUOTE]But to calculate the other 3 options they are using the Fully Index rate.
So basically if i opt for this, this will increase my Loan Balnce and make it more than the Original Principal balance becauae of Negative Amortization.
Now is this legally possible as they are forcing me to go to negative amortization by not giving me the other 3 options during the teaser period.
[/QUOTE]
I doubt that the lender is actually forcing the minimum payment. You can always pay more and it will either be applied to the interest or principal due. It sounds like your agent doesn't fully understand the loan.

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