Q. What is a Payment Option ARM?
A. A Payment Option ARM is an adjustable rate mortgage that offers up to four payments to choose from each month.
Q. What payment options are available?
A. Each monthly loan statement offers up to four options, giving you the ability to choose the payment that makes the best financial sense for your current needs.
> Minimum payment
Gives you more cash now by keeping monthly payments low.
> Interest Only Payment If the minimum monthly payment isn’t enough to cover the monthly interest due, choosing the Interest Only payment prevents the accumulation of deferred interest
> Fully amortized 30-year payment Pays all interest due for the month, reduces the principle, and pays off the loan on schedule.
> Fully amortized 15-year payment Choosing this option pays off the loan faster, saves substantial interest over the life of the loan, and builds equity more quickly.
Q. What occupancy types are eligible for a Payment Option ARM?
A. The Payment Option ARM can be used for any of these occupancies: primary residences, second homes, and investment properties.
Q. Are all four payment options available every month?
A. Each of the four payment options is available as long as they are greater than the minimum payment. Example: If the minimum payment amount for that month is greater than the interest only payment amount, the interest only amount is not available. Details on available payment options are clearly spelled out on the monthly statement.
Q. What are some examples of circumstances in which making the minimum monthly payment may be a good choice?
A. If your annual income is highly variable, such as a salesperson who receives one or more lump sums during the year, you may decide to pay the minimum monthly payment during certain months. Or, the minimum monthly payment may be a good choice during a month when you are faced with an unexpected expense, such as a major car repair.
Q. What is deferred interest?
A. Deferred interest is also called negative amortization, and occurs when minimum monthly payments do not cover the interest charges due. Ultimately, deferred interest can increase the size of a mortgage to greater than its original amount.
Q. What protections are in place to prevent deferred interest?
A. The Payment Option ARM is designed to prevent deferred interest from increasing the loan beyond 115% of its original balance. If this “cap” is reached at any point during the life of the loan, the loan is “recast”. The minimum payment will then be higher, and the increase may exceed the 7.5% payment change cap.
Q. How is the interest rate determined for the Payment Option ARM?
A. The Payment Option ARM is indexed to the COFI or 11 th District Cost of Funds Indices. The 11 th District monthly weighted average cost of funds (COFI) is one of many indices used by mortgage lenders to adjust the interest rate on the adjustable mortgages. The COFI is computed from the actual interest expense reported given month to month by the Arizona, California and Nevada Savings Institution members, and The Federal Home Loan Bank of San Francisco.
Q. Is there a limit on the amount the interest rate can change over time?
A. Essentially, the Payment Option ARM is a one-month adjustable rate mortgage. This means the interest rate may change after the introductory, one-month period. The lifetime maximum interest rate is 10.95%