Pay Option Adjustable Rate mortgage loans are a new product many mortgage lenders report is gaining popularity. This type of mortgage loan gives a homeowner the option to make lower monthly payments by deferring interest, paying interest only, making a payment amortized for 15 years, or making a payment amortized for 30 years; this mortgage is the Swiss army knife of mortgage loans.
Many homeowners who are self-employed or paid by commission that have problems documenting their income benefit from this mortgage. This is the perfect mortgage for anyone with a fluctuating cash flow. This includes salespeople, contractors, even first time homebuyers that need the lowest possible monthly payment. These mortgages are called “Pay Option Refinance Home Loans” and are fairly new in the mortgage marketplace. The option presents homeowners a choice for their monthly payments?
You can make a 15 year payment. This will pay off the mortgage principal the fastest and build equity in your home while saving thousands in interest payments.
You can make a 30 year payment. This is comparable to a traditional 30 year mortgage.
You can make interest only monthly payment. This allows for a small monthly payment; however, there is no equity built in your home. On the plus side this will allow you to have more cash on hand.
The last option is a one percent minimum monthly payment. This allows you to make payments at an interest rate of one percent. The danger here is if you do not make the minimum interest payments on your mortgage each month the interest is tacked on to your principal balance creating a phenomenon called “negative amortization.” If you experience negative amortization first hand, you will end up paying more for your mortgage than you were supposed to, much more.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
