Option ARM Components

Remember -- Option ARM's are not created equally! The components to consider when comparing Option ARM's with various lenders are:

1. The initial start rate
2. The margin
3. The index
4. Life-of-loan cap
5. Periodic cap
6. Annual payment cap
7. Maximum amount of negative amortization which can accrue
8. Payment options
9. Loan origination fees
10. Prepayment penalties

Let's determine how these various components factor into the equation:

The initial start rate:

The sole purpose of the initial start rate is to determine the amount of your minimum payment for the next 12 months. Initial rates can vary from a low of 1% (I have been told there is a lender that advertises a start rate of 1/2%, but I have not personally encountered that lender as of yet!) to as high as 4.5% dependent upon such factors as owner occupied vs investment property, a single family dwelling vs units, low loan-to-values (LTV) vs high LTV's, and others. Many lenders promote a 1% start rate. Given a loan amount of say $200,000, that would equate to a payment of $643.28 (based on a 30-year amortization; 40-year amortizations are available with some lenders). The $643.28 figure is the minimum payment which must be made for the next twelve months.