Fixed Rates, Lowest Payments

Love it or hate it, the Payment Option ARM or Pick a Pay mortgage has become one of the most popular home loans in the USA, accounting for over 40% of new loans since 2005, and is definitely the fastest growing option in high cost states like California, Florida, New York, New Jersey and Connecticut. While many people love the 1% start rates, there are a lot of people who don’t feel comfortable with the possibility of payments increasing in as little as 1 month on many of the most common programs. The common wisdom is that Option ARMs are incredible products for savvy homeowners and investors, but may be too powerful for the average homeowner to handle.

Introducing Hybrid Option ARMs
For the rest of us, an innovative class of new loans has been recently introduced for homeowners who want the security of a Fixed Rate mortgage, with the flexibility and exceptionally low payments of an Option Arm. These home loans go by many names, including Hybrid Option & Fixed Option Arms, but they have one thing in common: A fixed payment for several years. Some of these mortgages have fixed interest rates, some of them have fixed minimum payments which don’t go up, and some of them have both!

So what are the key benefits of Hybrid ARMs?
- Fixed Minimum Payments for 1, 3, 5, 7 10 or even 30 years
- Fixed Interest Rates for the Full Term on Many Programs
- Minimum Payment is typically 55% lower than a Regular Loan or better
- Increased Cash Flow, Decreased Risk Makes Housing Affordable & Secure
- Interest Only Payment Option Continues Even After Recast
- Greatly Reduces the Sticker Shock of a Fixed Mortgage
- Greatly Reduces the Payment Shock of an Adjustable Mortgage
- Greatly Reduces Negative Amortization
- Retains Flexibility of an Option ARM

Like an Option ARM, Your Payment Coupon Has 4 Options on it
1. Minimum Payment
2. Interest Only Payment
3. 15 Year Fixed Amortized Payment
4. 30 or 40 Year Amortized Payment

A Real World Example
Your Minimum Payment is generally close to half of what a regular fixed rate mortgage would cost, or otherwise would 3% or 4% lower than the fully amortized payment. Let’s take a look at a hypothetical scenario. Jane has a house in California which has been appraised for $400,000 and has a traditional fixed rate mortgage on the property of $200,000 on which she pays $1467.00 per month before taxes & insurance. If Jane were to refinance this mortgage into a Fixed Rate Option ARM, her minimum monthly payment would be about $800 dollars, about 55% of the cost she was paying previously. And both rate and minimum payment would still be fixed for 3, 5, 7, 10 or even 30 years. In fact Jane could take out $100,000 in cash out when she refinanced and she would still have a minimum payment of $1200 per month, and both rate and payment would remain fixed for 3, 5, 7, 10 or even 30 years.

But Do I Qualify?
Because of the very low effective rate of this financing and the very generous terms, these types of loans are generally available only to borrowers with credit scores of 620 or more. If you don’t know your credit score, you should call your loan officer and take a good look at your credit together. Other things to look out for are any late payments on your mortgage in the past 1 to 2 years, and of course any serious delinquencies like bankruptcies, liens or judgments on your credit report. Also, you will usually be limited to borrowing no more than 80% to 95% of the value of your home. And if you talk to your loan officer and they haven’t done a lot of Hybrid ARMs, get a new mortgage company, because there are a lot of ways they can steer you wrong simply out of ignorance. These Hybrid loans are new, powerful financial tools and are best handled by those with extensive experience with the product.

Fixed Rate Minimum Payment Option Loans are an increasingly popular and lower cost alternative to Interest Only mortgages, and are often referred to as Secure Option mortgages.

Some consumers do not feel comfortable with Option ARMS even though they do have some security in the rate being fixed for a certain amount of years. For these consumers there are traditional ARM's which you can get locked in for any number of years up through 10 years generally. Since most consumers sell or refinance every 4-5 years these types of mortgage make a lot of sense. They will provide you with the lowest payment and rate that is fixed for a certain amount of years as opposed to going with a slightly higher interest rate this is fixed for lets say 30 years. Therefore, when you are looking for the lowest payments and fixed rates, if you are not interested in a payment option ARM you can still consider other variations of ARM loans and even though they are not fixed rates for the life of the loan, they can still be fixed for long enough periods to serve and meet your needs. Consult a mortgage professional soon to find out which type of loan is right for you.

Before you sign any mortgage paperwork involving a pay option ARM have your mortgage broker go over any questions you may have. You will also want to exercise fiscal control when dealing with this type of mortgage, it is not meant for you to make the minimum payment and use the extra money for a new car. If you have that mindset you will wind up in trouble in a few years.

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

Fixed Rate Pay Option programs typically take a close look at the value and marketability of your home. Consult your mortgage professional to get a good idea of what your true home value is.

Fixed Rate Mortgages with negative amortization options allow borrowers to defer interest in any given month to be paid at a later date, usually when the loan recasts.

The first option is based on an an adjustable rate mortgage index otherwise knows as a variable rate mortgage where the interest rate on the note is periodically adjusted based on an index.

Option adjustable rate mortgages (ARM’s) have a fixed payment for the initial period and a low payment. The monthly payment can be less than interest only amount or the fully amortized payment. This can help provide cash flow or allow you to afford a larger home.

» DISCLAIMER: The information contained in this article on 'Fixed Rates, Lowest Payments' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.