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What is a Pay option ARM
What is a Pay option ARM - A Pay Option ARM is an adjustable rate mortgage that gives the borrower the option of selecting how much to pay each month based on different loan options. The borrower can choose any one of the different options included in their loan program.

Many new pay option minimum payment loans can be had with fixed payments for up to 5 years, which means that year after year, the payment will not increase by 7.5%, but will stay the same. So if you have a $500,000.00 loan with a minimum payment option of $1,264.00 and a five year fixed payment period, your payments will stay at $1264.00 for all 5 years.

The different options available for payments each month are a minimum payment, an interest only payment, a 30 year amortized payment and a 15 year amortized payment

The minimum pay option is the lowest possible payment and lets you keep more cash in your pocket each month. This payment typically changes annually and is recalculated based on the remaining principal balance of the loan, the remaining loan term, and the current interest rate. A payment cap is usually applied to ensure that they payment does not swing wildly from year to year. A typical payment cap is 7%. For example, if your minimum payment was $1,000 in year one, the most it would be in year two is $1,070 and the least it would be is $930.

The lower payments offered with a Pay Option ARM can be used to free up cash flow for use in other investments, such as starting your own business.

A Pay Option ARM may be a good choice for the self-employed or for people with erratic monthly cash flow.

Pay Option Adjustable Rate Mortgages are being offered by more and more banks. It is designed for home owners whose incomes are commission based, which can vary from month to month, and for those who have seasonal jobs, such as fishermen and vacation resorts, whose annual incomes are usually earned in 6 months.

Pay Option ARMS have been around for many years but until the past four or five years have been primarily used by investors. The rising cost of homes and the lack of cash flow in the average American household have made these loans very popular with owner occupied homes recently.

The pay option ARM is a very effective tool for someone that is interested in investing in multiple properties. With this loan a savvy individual has the opportunity to own two houses and keep his mortgage payments very close to what their payment is with just one Principal and Interest loan

Option arms or the pick your payment loan can adapt to fit your lifestyle. They offer flexible payment options and qualification standards. Investors like them for there low payments and cash flow potential.

Traditional home loan payments are the same each month for the term of the loan. With an Option ARM, you can choose from one of four payment choices each month -- which gives you the flexibility to change your mortgage payment as your needs change. You are only required to make the minimum payment on the loan each month.
Payment Options
1. Minimum Payment
2. Interest Only Payment
3. Fully Amortized 30 year payment
4. 15 Year Payment

Main Benefits of an Option Arm

To minimize your house payment to pay off other debt.
To control how much tax-deductible interest you pay monthly.
To maximize your buying power.
If your income tends to fluctuate.

How an Option Arm Works

The minimum payment can only increase or decrease by 7.5% per year. There would be an adjustment to your payment is rates have moved up or down. After 5-years an option arm will recasts which ensure your loan will be repaid within the given term or 30 years. This means your new payment would be calculated to pay the loan off in 25 years.
Since the minimum payment is so low you may not be paying off all of the interest each month. This is called deferred interest and will be added to your principal balance. Deferred interest can be tax deductible when you refinance or sell your home.
A lifetime interest rate cap limits how high your interest rate can reach.

Pros and Cons Of An Pay Option Arm - If you are considering an option arm there are many things that you should be aware of. Like any other type of loan it is very important to completely understand how the loan works, and what that will mean to you in the long run.

The ability to make minimum payments is not limited to Adjustable Rate Mortgage products, there are fixed rate loans with minimum payment options which allow substantially lower minimum payments than conventional mortgages without sacrificing any of the stability or predictability of the classic 30 year fixed.

One con of the the pay option arm is that if you make the minimum payment option each and every month, you will most likely incur negative amortization. Negative amortization is when your loan balance actually increases instead of decreases. Negative amortization occurs because the minimum payment that is required is not high enough to cover the interest portion of the payment. Therefore, please understand how the Pay Option ARM works and that your mortgage loan balance can actually go up instead of down which can eat away at the equity you have available in your home.

Because of its flexibility, the Pay Option ARM it can be catered to meet the needs of many borrowers.

People with fluctuating incomes can benefit from the Option Arm because it allows more payment options each month.

The pay option arm can be very useful for savvy investors. The low minimum required payment means increased cash flow can be used for other investments. And because some pay option arms have introductory fixed rates for up to 5 years, an investor can determine how much the additional leverage of deferred interest will cost in the long run.

Payment option arms offer up to four different payment options each month that gives you the ability to choose the payment that best fits your financial needs that month;
- The minumum payment
- Interest Only Payment
- Fully amortized payment (30 or 40 year term)
- Fully amortized 15 year payment.

To fully utilize the benefits of a pay option ARM it takes a lot of control and common sense. The last thing that you want to do is take the money you save by making the minimum payments and buy a depreciating asset such as a car or boat!


  • Good investment tool (more positive cash flow for investors)
  • Borrower can put extra savings into IRA or 401K plan that can outpace the negative amortization
  • Allows you to afford more house than you would normally qualify for
  • Takes advantage of high appreciation rates in certain areas


  • Negative Amortization can lead to a higher mortgage balance than you started with
  • Not a good loan for irresponsible borrowers
  • Allows you to afford more house than you would normally qualify for
  • Many lenders will not give you a 2nd mortgage behind the negative amortization 1st, so if you're planning on getting a 2nd in the near future, your options will be limited

The pay option arm could be a great way of obtaining property you only wish to hold on to for a short period of time. However, be aware that the longer you pay the minimum payment only, the more you could owe in the future.

Who Can Benefit From an Payment Option ARM - Self-employed borrowers with inconsistent income
Borrowers with inadequate or no retirement savings
Borrowers who want cash reserves for emergencies
Borrowers who need money to start or expand a business
Borrowers who need mortgage payments to be as small as possible
Borrowers who want to stop using high interest credit cards
Borrowers seeking financial flexibility

Due to the large number of recent entrants into the California real estate market over the past few years, and the extensive use of Payment Option / Minimum Payment & Interest Only mortgage types in the state, housing prices in the state aer significantly higher than most surrounding areas on the West Coast. Many borrowers are able to use the minimum payment option available on these loans to dramatically reduce their housing costs for several years.

My estimate would be that in the state of California, somewhere near 70 per cent of homeowners could benefit from an Option ARM loan program. I base this on the fact that monthly cash flow is a problem as evidenced by the high credit card debt that some many households are carrying.

In an area of high appreciation using an Option Arm on an investment property allowing it to have a positive cash flow while the property is being rented out and selling the rental after a period of time may be an advantageous way to use an Option ARM.

Pay Option ARMs are great for many borrowers. Another common situation is borrowers who own a rental property. The flexibility and minimum payments can be used to maximize cash flow from the property and or to off set additional expenses such as repairs.

The great thing about the Pay Option ARM is that it can benefit most people. Because of its flexiblity, it can be catered to meet the needs and goals of most people. I personally like the Pay Option ARM because it gives me more cash flow on my rental property and I have more money to invest in other properties or investments.

However, it really needs to be conveyed that this loan is NOT meant for everyone. The PayOption mortgage can have its down falls and if you are not the type of person who is very involved with their finances, you might want to consider a 3/1 or 5/1 Interest only ARM.

The pay option arm is a great alternative for those considering a Reverse Mortgae giving them a much lower payment option.

Pay Option ARM is also referred to as a Pick a Payment loan. It gives the borrower the option to make one of four payment types every month, (1) minimum payment, (2) interest only payment, (3)payment based on 30 year amortizations, and (4) payment based on 15 year amortizations.

One of the negative effects of this mortgage can be the negative amortization of your mortgage over time. This, in simple terms, is adding debt to your property, and can happen if you always pay the lowest payment, as it is usually 1-3% interest rate. The difference between what your fully amortizing rate is, and this low rate, will be the debt added to your home.

This loan can be great, however, when the market is hot! Often times you can get into an investment property, pay less than the current rent rates, and still gain value in the property. This is a great tool for leveraging cash when trying to buy multiple rental properties. Once the market turns, you can refinance the properties into traditional mortgages and cash out on the refinance to cover any deficiencies between your new mortgage payments and the rent you are collecting.

One of the hottest mortgage programs on the market these days is the option arm mortgage. Alternatively you may have heard of option ARMS by the names "Pay Option ARM" "Payment Option ARM" "12 Month MAT" or "Pick-A-Payment Mortgage". And we've discovered that there are at the least 4 compelling reasons why smart and savvy borrowers are flocking to Option ARMS... these pick-a-pay loans give the borrower 4 different payment amounts to choose from every single month.

The First Payment Option is based on a start rate as low as 1%, sometimes even less, depending on your credit and a few other factors. Your Second Payment Option is usually on an interest only choice. Pay Option Three is generally a principal and interest payment choice amortized over 30 or 40 years depending on the program you select. Finally, for those times when you have extra money available and you want to pay down your principal and build equity faster, the fourth choice is a pay option based on the 15 year amortized payment to pricipal and interest. In Summary, an option arm provides you with flexible options every month, which help to manage your cash flow and monthly budget with more control. And you can get a lot more house for your money, or free up that cash flow to start your own business or make investments.

The best way to put a pay option arm mortgage to work for you is to talk with one of our experienced option arm experts who will design a personalized program just for you based on your own individual or your family's goals, income, monthly bills and future housing or investment property plans.


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