Once I googled for Option ARM and the top search result read Nightmare Mortgages. Very … hmmm … intriguing, isn’t it?

Well, as I always say, you have to have a clear idea of how a mortgage plan works. Once you are sure, that you understand it, you can decide for yourself, whether such an Option is likely to become your nightmare.

The Option Adjustable Rate Mortgage offers the borrower several options for each monthly payment. The mortgage contract states what exactly variants are possible. The first one or two months, depending on the contract, the borrower is entitled to a very low interest rate and a very low period payment amount. When this introductory period expires, the rate goes up and each period payment is paid according to the selected option. The usual available options are: a minimum payment, or an interest-only on a 30-year mortgage payment, or a fully amortizing 30-year mortgage payment, or a fully amortizing 15-year mortgage payment. That means that one month you can pay only the interest and the next monthly payment may equal to a monthly payment of a 30-year Adjustable Rate Mortgage with your balance and the rate of the day. If you choose the minimum payment option, which is a really low amount - just imagine what you can do with the “saved” money!!! Where’s the nightmare, you say? Well, it is already there, but it is not obvious yet, that’s why a lot of people make a mistake and agree to these terms without reading the fine print thoroughly. The word “saved” is in quotes only when you read it, not when you hear the broker say it… Read the rest of this article »

The Adjustable Rate Mortgage does not seem to be very attractive to borrowers mostly because of the apparent complexity of its mechanism. When people hear about market indexes, constantly increasing rates and negative amortization, they don’t want to listen to this any more and just go for the good old Fixed Rate Mortgage. Before you follow their easy steps too, consider reading at least this article and make your final choice based on some knowledge, not on the lack of any desire to deal with anything more complicated than a fixed amount to pay every month.

Now, get yourself a cup of good coffee and prepare to learn about market indexes, increasing interest rates and negative amortization.

What’s the most important thing to remember about the Adjustable Rate Mortgage? Well, naturally, that the Interest Rate gets adjusted a number of times within the life of the mortgage, but – now comes the most important thing – it can increase (or decrease) only to the limit specified in your mortgage contract! That means that the lender is not totally free to impose any rate on you any time of the day. That’s the good news. The bad news is Read the rest of this article »

I don’t think it’s hard to understand why a Fixed Rate Mortgage has been the most popular type for decades – most people like stability, and that’s exactly what they get with this kind of mortgage: the Interest Rate is fixed throughout the life of the loan; the monthly payments are fixed, too, if you want them this way. There is nothing tricky or unexpected about this mortgage program. The Interest Rate may be higher than with an Adjustable Rate Mortgage, but you can be absolutely sure, that no matter what, it will not go any higher.

So it is a sound steady payment plan, but is it good for you?

Let’s see into the mechanism, which provides this stability.

Your monthly payment consists of two parts: repaying the Principal and paying the Interest. The amount of the Interest part is calculated as a percentage of the remaining Principal (the balance) of the day. So, every time you pay some of the Principal off (with your monthly payment or some extra payment), the balance becomes smaller, which means that the next Interest payment will be the same percentage but of a lower amount. This Fixed Principal scheme suggests that Read the rest of this article »