Pros and Cons Of An Pay Option Arm - If you are considering an option arm there are many things that you should be aware of. Like any other type of loan it is very important to completely understand how the loan works, and what that will mean to you in the long run.

The ability to make minimum payments is not limited to Adjustable Rate Mortgage products, there are fixed rate loans with minimum payment options which allow substantially lower minimum payments than conventional mortgages without sacrificing any of the stability or predictability of the classic 30 year fixed.

One con of the the pay option arm is that if you make the minimum payment option each and every month, you will most likely incur negative amortization. Negative amortization is when your loan balance actually increases instead of decreases. Negative amortization occurs because the minimum payment that is required is not high enough to cover the interest portion of the payment. Therefore, please understand how the Pay Option ARM works and that your mortgage loan balance can actually go up instead of down which can eat away at the equity you have available in your home.

Because of its flexibility, the Pay Option ARM it can be catered to meet the needs of many borrowers.

People with fluctuating incomes can benefit from the Option Arm because it allows more payment options each month.

The pay option arm can be very useful for savvy investors. The low minimum required payment means increased cash flow can be used for other investments. And because some pay option arms have introductory fixed rates for up to 5 years, an investor can determine how much the additional leverage of deferred interest will cost in the long run.

Payment option arms offer up to four different payment options each month that gives you the ability to choose the payment that best fits your financial needs that month;
- The minumum payment
- Interest Only Payment
- Fully amortized payment (30 or 40 year term)
- Fully amortized 15 year payment.

To fully utilize the benefits of a pay option ARM it takes a lot of control and common sense. The last thing that you want to do is take the money you save by making the minimum payments and buy a depreciating asset such as a car or boat!

Pros:

• Good investment tool (more positive cash flow for investors)
• Borrower can put extra savings into IRA or 401K plan that can outpace the negative amortization
• Allows you to afford more house than you would normally qualify for
• Takes advantage of high appreciation rates in certain areas

Cons:

• Negative Amortization can lead to a higher mortgage balance than you started with
• Not a good loan for irresponsible borrowers
• Allows you to afford more house than you would normally qualify for
• Many lenders will not give you a 2nd mortgage behind the negative amortization 1st, so if you're planning on getting a 2nd in the near future, your options will be limited

The pay option arm could be a great way of obtaining property you only wish to hold on to for a short period of time. However, be aware that the longer you pay the minimum payment only, the more you could owe in the future.

Pros and Cons of Pay Option ARM loans - A Pay Option ARM loan is a very flexible mortgage loan. There are many benefits and drawbacks of these types of mortgage home loans. The main benefit of a pay option arm loan is that this type of mortgage provides you with the most flexiblity for making your monthly payments. You are given, usually, four payment choices each month to choose from. You can lower your monthly expenses significantly if you choose to make the lowest payment option. These types of loans are not right for everyone and you should consult a mortgage professional to see if it may be right for you.

A potential risk associated with Pay Option ARM is possible negative amortization. Negative amortization occurs when over time the loan balance is more than the original loan amount. When a borrower makes minimum payments, which is less than the interest accrued for the month, the interest left unpaid is added to the loan principal. Instead of pay down the principal, the homeowner can end up owing more than what he borrowed. In a real estate market where home values are unchange or even depreciating, negative amortization can be disastrous.

Option ARM's may cause "Negative Amortization" only if the appreciation is less than 3% per annum. If one is able to take the difference between the minimum payment and the full interest payment and put this amount into a tax free investment vehicle then one would be able to payoff one's mortgage that much faster.

Deferral of interest is definitely not for everybody, but for most people the ability to pay less than half of a standard mortgage payment to live in the home they desire is a more than compelling reason to consider payment option loans. Small minimum payments and deferred interest are siginificantly better alternatives to missing large conventional payments and losing one's home in foreclosure.

++