Bob and Ann are a fictional couple, but there are plenty of homebuyers just like them who are finding they have “options” when it comes to designing a mortgage and payment program that meets their needs now, as well as during those months when cash flow is a challenge.

Today, homebuyers like Bob and Ann can select what’s known as an “Option ARM,” an adjustable rate mortgage that gives homeowners up to four different monthly payment options.  Option ARMs appeal to self-employed people (as well as to those who work on commission or want to pay off other debt which carry higher interest rates such as credit cards) by offering a level of flexibility they wouldn’t have with a traditional fixed monthly payment that remains the same over the entire term. 

“Option ARMs also appeal to homebuyers whose incomes will be rising in the future by offering a low introductory rate that allows lower payments in the early months of the loan and larger payments as the homeowner’s income increases,” said Lamont Smith, Sr. Loan Consultant of Washington Mutual.

With an Option ARM, borrowers may choose to:
• Use the minimum payment option to conserve cash or free up income for other uses, such as making home improvements or paying off a high-interest credit card balance. This option defers the payment of principal and may not cover all of the interest due for that month.  Unpaid interest is added to the principal loan balance.
• Pay only the interest due that month. 
• Pay the full principal and interest due that month.  Selecting this option keeps the loan payment on schedule.
• Pay the loan balance down faster by paying at the 15-year payoff rate (available only with 30-year Option ARM loans).  This option can save homeowners thousands of dollars in interest charges over the long term.

To help borrowers understand exactly how much they can choose to pay with the four option scenarios, Washington Mutual spells out the details of each option on its monthly loan statements.

Option ARM interest rates adjust but feature a lifetime cap that limits the percentage increase or decrease.  Every 12 months, the minimum monthly payment is adjusted to reflect the current loan balance. Generally speaking, the minimum payment can only increase by 7.5 percent from the previous year’s monthly payment amount. The major difference from a traditional ARM – and the one exception to the maximum 7.5 percent increase in the annual minimum payment – is that the Option ARM balance is recast every five years to keep it on schedule, or any time the unpaid principal balance increases to more than 110percent (110 percent in New York) of the original loan amount.  When these recastings occur, it is possible that the minimum payment amount may increase or decrease by more than 7.5 percent.  This means that the minimum monthly payment can increase significantly.

Borrowers who plan to defer interest payments on a regular basis may want to seek advice from a qualified tax adviser to determine the impact on their taxes, according to Smith. It also is important that borrowers who routinely choose the minimum payment option understand that the interest they defer will be added to the unpaid principal balance.

With this scenario, called “negative amortization,” additional interest is charged on this new, higher balance, thus increasing the cost of ownership over the term of the loan.  A combination of a slow real estate market and continually rising interest rates could mean a borrower might owe more than the home is worth.

“Option ARMs aren’t for everyone, but they do provide an excellent way for homebuyers to manage their financial resources by making a higher monthly payment when their income is stable or rising or making a smaller payment if their cash flow demands it,” said Margarita Garr, Sr. Loan Consultant.

“We work closely with borrowers to review their needs and make sure they understand how Option ARMs work and what happens when interest rates increase, or when the loan is recast.  We want people to understand what to expect so there are no surprises when there are adjustments.”

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Lamont C. Smith

 

Margarita Garr

Pasadena Now wishes to thank Margarita Garr and Lamont Smith of Washington Mutual for assistance with this story.
"At Washington Mutual," says Smith, "we believe that there is no substitute for an informed borrower. Whether you've just found your dream home, want to check today's rates or would like to learn about the various home lending options available to you, we're ready to help. We're dedicated to making the home loan experience a positive one and minimizing the hassle and stress of buying a home."
For more information about a personalized home loan, contact Margarita Garr and Lamont Smith at (626) 577-6211 or (866) 622-6981 or e-mail them at Margarita.Garr@Wamu.net and Lamont.C.Smith@Wamu.net.

Certain restrictions and conditions apply. Programs subject to change. Washington Mutual has loan offices and accepts loan applications in: Washington Mutual Bank Inc. many states; Washington Mutual Bank, doing business as Washington Mutual Bank, FA - many states; and Washington Mutual Bank fsb CA, ID, MT, UT.  Washington Mutual is an Equal Housing Lender.