The option ARM mortgage has many names, including “pay-option mortgage”, “negative amortization loan”, “pick-a-payment”, or “deferred-interest loan”, to name a few. Similar to the reverse mortgage, it allows a homeowner to pull out a lump sum of equity, while only taking on a relatively small mortgage payment. A few differences are that the homeowner can be of any age, but the money must be taken as a lump sum (no credit lines). Although the interest rate is generally between 6% and 12%, the borrower only makes monthly payments for between 2% and 5% annually of the loan balance. This gets paid monthly (take 2% to 5% and divide by 12). For example, if the payment is 5% and the interest rate is 8% (a common scenario), then the interest that is not being paid is 3%. (8% minus 5%). Similar to a reverse mortgage, the lender allows that 3% of unpaid interest to be repaid at a later date by adding it to the principal balance of the loan. Thus, the loan balance grows over time, even though payments are being made. But there is a limit on how much the loan balance is allowed to grow. Depending upon the lender, once it reaches around 110% to 115% of the original loan balance, a full mortgage payment must be made.

Part 4 will follow in a couple days.

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