Typically, option arm mortgage loans give the consumer four payment options each month – a 30year fixed payment, a 15 year fixed payment, an interest only payment and a deferred interest or minimum payment.
The 30 year, 15 year and interest only payments are based on the fully indexed rate. The fully indexed rate is calculated by adding the margin to the index. The index would most likely be the Libor, MTA, COSI, COFI, or CODI.
Heres an example:
Lets say you have a margin of 3.15 and an index of 3.32. This would give you a fully indexed rate of 6.47% (3.15 + 3.32 = 6.47). This is the rate that is used to compute the 30 year, 15 year, and interest only payments.
Depending on the lender and loan program you select, the deferred interest or minimum payment could either stay fixed between 1% and 2% for 5 years or the PAYMENT could start at around 1% and go up or down a maximum of 7.5% annually for 5 years.
The minimum 1% to 2% payment is an interest only payment and is based on a 30 or 40 year amortization.
The reason an option arm loan is called a deferred interest or negative amortization loan is because the difference...
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