Option Loans
Option loans sometimes
called option arms are not right for everyone who is looking to purchase a home.
Here we will explain some of the pros and cons of financing through a 1.25%
option loan.
Pros:
Option loans or option arms are of the greatest benefit to people with
fluctuating or temporarily-low incomes. College students who are only able to
work part-time may be able to afford their own home by paying the minimum
payment while in school. By the time that the mortgage converts to a traditional
adjustable rate mortgage, they will have graduated. They should then be able to
afford the fully amortized payments. Additionally, people with fluctuating
incomes may be able to pay more when their income is higher and less when their
income is lower. Though it may average out to be the same amount they would have
paid monthly with fully amortized payments, it saves them the hassle of trying
to save money to pay their mortgage payments during their slow months.
Option loans can also be beneficial to people who do not plan to own
their home for a long period of time. Because they are most likely not
interested in earning equity in the home, they can simply pay the interest
payments and resell the home for the principal amount. Young professionals and
people who are planning to relocate within a few years might find that this is a
better option than renting a house, and it is often less expensive.
Cons:
The problem with paying the minimum payment on your mortgage each month is that
the interest you are not paying is added to your principal amount. You are then
charged interest on your interest. Adding to your principal amount every month
in this way can easily cause you to end up owning more than your house is worth.
Paying the interest-only or minimum payment on your mortgage does not earn you
equity in the home. Borrowers who are seeking equity will be better off in a
traditional mortgage.
Option loans do not have the interest caps that traditional loans use in
order to protect consumers. This means that if the index rate were to jump, you
would still be responsible for that rate plus your margin.
Option loans or Option Arms also have very complicated terms. This often
encourages predatory lenders to prey on uneducated consumers. Speak with a
licensed mortgage broker before entering into any mortgage to make sure that you
choose the loan that is right for you.
Mortgage Glossary7
