Most people choose an Option ARM if they want to purchase a more expensive house than they could otherwise. They can do this because the initial payments are usually very low, especially compared to other ARM’s and FRM’s. However, it is possible (perhaps likely) that the payments will go up as time increases. This is especially true for those exercising the “minimum payment” option. In Option ARM’s, the interest rate adjusts monthly, but the payment adjusts annually. Occasionally, the payment amount will change in order to make sure that the loan can be paid off by the end of the term. This can occur every five to ten years and will be figured in regards to the current interest rate.

One thing to keep in mind is that since payments will increase in the future with an Option ARM, you must be sure that your income will also increase in turn. If it doesn’t, you need to be prepared for the consequences, specifically, the possibility of a much higher payment which could hit you suddenly. All of these factors must be considered when shopping for an Option ARM, as well as an important facet known as the “margin.” Your rate that you pay on top of your principal loan amount is a combination of the actual interest rate and the lender’s “margin.” The margin is a markup that the lender adds to the interest rate and is the lender’s cost of doing business as well as the profits they will make on the loan. Be sure to shop around for a good margin when looking for an Option ARM.

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