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, and is definitely the fastest growing option in high cost states like California, 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 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 or 7 years
- Fixed Interest Rates for the Full Term on Many Programs
- Minimum Payment is typically 55% lower than a Regular Loan
- 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 55% of what a regular fixed rate mortgage would cost. 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 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 or even 7 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, or 7 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 find out. 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 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 (which we cover in a few of our other articles on the subject). These Hybrid loans are very new, very powerful financial tools and are best handled by those with extensive experience with the product.
But Wait There's More!
We've had so many questions from consumers and success stories from our customers who have used this loan, that we have decided to publish a series of articles to inform our readers about this new category of products, and will be covering a variety of topics including some of the most common and some of the most creative uses of this financing, as well as a detailed look at the benefits and risks of this type of mortgage as compared to traditional fixed mortgages and Option ARMs.
