Have you heard about or been interested in finding out more about option one mortgage loans? They are becoming very popular, but its important to understand how they work before you apply for one. I will describe, in this article, an overview of most common type of option ARM mortgage loan or option one mortgage loan.
How do they work? Option one mortgage loans are basically interest only mortgage loans, except that first year, you pay only 1.25% of interest on loan. The remainder of interest that is accruing is being added to loan amount. The second year of loan you pay more interest until gradually you are paying either full interest only payments or fully amortized payments (interest & principle). The reason loans are called option loans is because every time you have a payment due, you have option of paying less than interest only portion, interest only or a fully amortized payment. This option would be good in a situation where your income is sporadic.
This mortgage loan type typically gives you 4 payment options in every bill.
Here are your typical monthly payment options:
Option #1 – Pay a 15-Year fully amortized payment amount (p&i)
Option #2 – Pay a 30-Year fully amortized payment amount (p&i)
Option #3 – Pay interest-only portion of loan (Interest Only)
Option #4 – Make a partial interest payment (1.25% - 1.95% depending on your loan type) and defer paying additional interest to total loan amount. (Deferred interest can be counteracted by making bi-monthly payments and by property appreciation)
This type of loan is good if you want to:
Wait a while to refinance again – If interest rates drop again, so does your payment. If you want to accelerate your payments and increase equity quick, pay more on your loan and it will be applied to future payments & will be directly applied to principle balance. Will you want a 30-year loan? Keep option to pay your loan as a 30-year, 15-year, or interest only payments.