With most mortgages, your payment is the same every month. But what if your paycheck isnt so regular? Would you like to be able to vary your mortgage payment depending on your cash flow? An option ARM — also called a flex-ARM or pick-a-payment loan — allows you to do just that.
How does it work?
An option ARM is an adjustable-rate mortgage with a twist. You dont pay a set amount each month. Instead, the lender sends a monthly statement with up to four payment options. You simply choose the amount you want to pay that month and then submit your payment.
The options vary, but heres the most common menu:
Minimum payment: This is calculated using an initial interest rate that can start as low as 1.25 percent. Because this payment is so low, its useful for months when you dont have much cash on hand, perhaps because you are waiting for a commission or bonus check. But any unpaid interest gets deferred, or added to the principal of the loan, so your principal grows.
Interest only: You pay all the interest due, but none of the principal. This doesnt reduce your mortgage balance, but it allows you to avoid deferring interest....
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