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Pay Option ARM

Las Vegas Nevada Pay Option ARM

You may have seen advertisements offering refinancing for very low rates starting around 1% going up to 3% or a loan advertising a pick a payment structure.  The lenders were flashing eye catching, extremely low monthly payments.  The payment program gives an option to pay one out of four payment amounts, a minimum interest payment, an interest only payment, a 30 yr payment (principal & interest) and a 15 year payment (principal & interest).  Because the minimum payment is so much lower than the fully amortized payment, it appears that the borrower can afford a much larger loan amount.  

This loan type works ideally for those that have an off again-on again influx of income.  This typically occurs with commissioned based income or tip earners.  For example, one month you can afford to pay down the interest and principal when you've received a commission check or a large amount of tips and the next month, while business is slow, one could pay the minimum payment. 

We are seeing that about 80% of the borrowers pay the minimum payment only and never contribute towards the full interest payment let alone even touch the principal payment.  The huge downside to this loan is that the interest that wasn’t paid is added back on the principal loan amount thereby eating into the equity of the home.  When the bank recasts the payment structure now with the higher principal amount, the borrower is now left with an even larger payment than was ever expected.  Thus it is neither a long term solution to being able to buy a bigger house nor a long term solution to lowering the existing payment if one expects to pay only the minimum. 

We were seeing that this loan program worked very well in housing markets that was making enormous returns in equity each year.  Even with the interest being tacked back on the loan, the home owner was still seeing returns with the large percentage of annual appreciation in the home.  Now that the housing market has taken a turn, this loan is sending many home owners into default and into foreclosure.

This loan is a useful financial tool when used sensibly.  It is a customized loan that suits a very specific borrower and is not recommended by myself for everyone. 

If you are wondering whether a
Pay Option ARM is for you...
Contact Casey Moseman

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