The Option ARM can be a great financing tool to help buyers and home get the loan they need but also give them maximum flexibility in their monthly payments. The Option ARM starts off with a very low start rate as low as 1.25% on which the loan is based. This rate is usually locked in for the first one to three months then the interest rate is adjusted to the “fully indexed” rate which is usually higher. The fully indexed rate is the sum of the index usually the “MTA” index and the margin (or banks profit margin) on the loan.

For Example lets assume a $300,000 loan with a start rate of 1.25% and a fully indexed rate of 5.5%.* The initial and fully indexed rate payments are as follows:

Payment at 1.25% rate =          $999.76

Payment at 5.5%

Fully indexed Rate=               $1703.36

Although the rate is adjusted to the fully indexed rate in the fourth month of the loan, the borrower is allowed to continue to pay at the initial 1.25% payment rate for the remainder of the whole first year. In doing so the borrower is allowed to differ the difference between the two payments as interest back on to the principal of the loan. This “deferred interest can be paid back at any time and indeed the borrower 4 choices to pay on their payment each month.

1.   Pay at the 1.25% payment rate =  $999.76

2.   Pay interest only payment  At 5.5%   =   $1375.00

3.   Pay principal and interest At 5.5% fully indexed rate  =   $1703.37

4.   Pay principal and interest  at 5.5% on 15 year  amortization = $2451.25

By allowing this unique payment flexibility the Option Arm really becomes an excellent financial planning vehicle which allows home buyers and refinancers to manage their mortgage in the way that best makes sense for them personally. It is also able to adapt to borrowers changing financing needs so there is usually no reason to ever refinance again , since the mortgage “adapts” to the homeowners changing circumstances and needs!

Underlying the Option ARM is the MTA index which is one of the most stable adjustable rate indices available. The MTA stands for “monthly Treasury Average” and is a 12 month rolling average of Treasury Bills adjusted to a constant maturity of one year. In layman’s terms the MTA is a on yearly average of the one year Treasury Bill and as such smooths out the ups and the downs found in most adjustable rate indexes like the straight one year T-Bill, or the Libor indexes. This stability gives borrowers more “upside” rate protection than those other indexes on a historical basis which means when rates rise loans tied to the MTA usually go up less than loans tied to other indexes so they are better protected.

The loan further builds in a 7.5% annual payment cap to protect borrowers from payment shock.

For example if the initial payment is $999.75 for the first year the most the monthly minimum payment can rise or fall from year to year is no more than 7.5% of the previous years monthly minimum payment. In this example for instance the most the payment can rise to in year 2 is $1074.73, a manageable rise of only $74.98 per month. So each year the monthly minimum can only rise or fall 7.5% of the previous years payment which keeps changes in the payment more manageable than most adjustable where the payment can increase as much as 20% in one year.

Every 5 years the loan is reamortized and that’s the only time the payment can increase more than the 7.5% to make sure the loan stays on its proper amortization schedule.

Finally the fully indexed rate floats slowly on a monthly basis according to the movements of the MTA index. As discussed previously this is a slow moving index because it is designed to be a 12 month rolling average. What this means is even if interest rates spike for one month, because that one spike is averaged with 11 other months it prevents the index as a whole from rising quickly, unlike the more common straight one year T-bill or Libor indexes. This greater stability along with the “constant payment” option of the Option ARM offers borrowers comfort and security to afford the home they want and keep a manageable payment.

If you would like more information regarding the Option ARM please contact us at info@Excellending.com or call #800-405-1156 now and find out how affordable your dreams can be!