Option ARM Mortgage
By Ken Ellsworth

A Pay Option ARM Mortgage is a loan that gives you four payment options each month. These are typically advertised as "1%" loans. These loans contain the following four options:

1. Option ARM Mortgage Minimum Payment
   This is the fabled 1% payment. The loan is amortized at a rate of 1% to determine what this payment is.

2. Option ARM Mortgage Interest Only Payment
   This payment is really a 1 month adjustable loan in hiding. This rate is found by adding the margin to the current index to come up with a new rate each month. This is the real interest rate on the loan. For example, if the margin is 3.5%, and the index this month is 3.884, your true interest rate is 7.39% If the amount of interest owed in any given month is HIGHER then the minimum payment, and you make the minimum payment, the difference is added to your principal balance. This is called "Negative Amortization". Example: On a $400,000 loan, the minimum payment would be $1,286.56. If the margin was 3% and the index was 3.8%, the interest due for the month would be $2,266.66. This interest is owed no matter what payment you make. If you chose to make the minimum payment of $1,286.56, $980.10 would be added to your principal balance. The next month you would be charged interest on $400,910.10.

3. Option ARM Mortgage 15 Year Fixed Payment
   This takes your fully indexed rate, which is the index plus margin, and amortizes it over 15 years. You pay principal with this payment.

4. Option ARM Mortgage 30 Year Fixed Payment
   Same as above except spread out over 30 years instead of 15.

Because of the nature of the Pay Option ARM Mortgage, The Ellsworth Team does not recommend this program for most borrowers. It is available upon special request only.