With conventional mortgage refinancing, the homeowner pays a set amount every month to reduce the mortgage principle until the end of the loan term. This gradual reduction of your loan balance is a feature of fully amortizing loans. Payment option loans are different from conventional mortgage in a number of ways.
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Mortgage Payment Options
When mortgage refinancing with an option mortgage, you have several different payment “options.” There is a fully amortizing payment based on a 15 or 30 year term length, an interest only payment, and the minimum payment amount. The 15 or 30 year fully amortized payment is just like the one you would make with a conventional mortgage loan. The interest only payment only covers the interest due that month and none of the mortgage principle. The minimum payment amount is the smallest amount you can pay to keep your account current and does not cover all of the interest due in a given month. Any unpaid interest is added to the loan’s principle balance.
The Mortgage Option Period
The option period of your new mortgage only lasts for a period of time specified in your loan contract, often five years. At the end of the option period the loan is converted to a standard Adjustable Rate Mortgage amortized for the remaining loan term. This means you will have to make fully amortizing mortgage payments for the duration of the loan’s term.
Risks and Rewards of Payment Option Mortgage Refinancing
Payment option mortgages are extremely useful for homeowners experiencing a temporary loss of part of their income. If you cannot afford fully amortizing mortgage payments for a period of time due to a loss of income, payment option mortgage refinancing could be right for you. It is important to understand the risk of using this type of mortgage, namely if you make the minimum payment amount your loan will become negatively amortized and lead to a mortgage payment you cannot afford, even losing your home.
You can learn more about your mortgage refinancing options, including costly mistakes to avoid by registering for a FREE, six-part video tutorial.