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Should You Try Option ARM?

Contributed by mm | September 8, 2006 7:09 AM PST





Option ARM is inherently dangerous, but if you are the right candidate, this can be a great financial tool for you.

From Bankrate:

An option ARM is an adjustable-rate mortgage that gives the borrower four choices of a payment each month. The borrower can pay the amount necessary to pay the loan off in 15 years or in 30 years. The borrower can pay only the interest charged in the previous month. Or the borrower can make a minimum payment that doesn't even cover the interest, so that the loan balance increases.

Most option ARMs have absurdly low introductory rates, sometimes below 2 percent, that last just a month. Then they rise. And rise. The rate changes each month, but the minimum required monthly payment changes only once a year.

...

Most option ARMs are indexed to the average yield on one-year Treasuries in the past year -- an index known as the one-year MTA. That average has been rising steadily and will continue to rise. The rate on the loan is calculated by adding the one-year Treasury average to a margin that varies from loan to loan.
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