Option ARMs (Hybrid Mortgages)

The major option arms are: Cost of Savings Index, MTA Index, Cost of Funds Index, Certificate of Deposits Index.

It’s your choice every month
Every month, you can choose from up to four payment options to make:

Minimum payment
The smallest payment to let you keep the most cash now.

Interest-only payment
Keep payments manageable while paying all your interest.

Fully-amortized payment
Reduce your principal and pay off your loan on schedule.

15-year payment
Own your home twice as fast.

Option 1: Keep payments manageable

The minimum monthly payment, Option 1 gives you more cash now and keeps your monthly payments manageable. Generally, this payment amount changes annually and is calculated using the initial interest rate for the first 12 months. The minimum monthly payment is usually recalculated annually thereafter, based on the outstanding principal balance, remaining loan term and prevailing interest rate. Your loan consultant will provide you with complete details for your specific loan.

The Option ARM's 7.5% payment cap limits how much the Option 1 payment can increase or decrease each year, except for every fifth year (beginning in the 10th year on certain programs), when the cap does not apply.*
At times, the payment amount change allowed by the cap may not be enough to fully amortize the loan. Then a portion of the interest will be deferred, and added to the balance of your loan.

*In the event your balance exceeds your original loan amount by 125% (110% in N.Y.), the payment amount may change more frequently without regard to the payment cap.

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Option 2: Pays all the interest

At those times when the minimum monthly payment is not sufficient to pay the monthly interest due, you can avoid deferred interest by paying the minimum monthly payment plus any additional interest accrued during the month (same as interest-only payment). Your payments remain manageable, with no change in your principal balance for that month.

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Option 3: Pays principal too

This is the fully amortized payment. It is calculated each month based on the prior month's interest rate, loan balance and remaining loan term.

When you choose this option, you pay all the interest due and reduce your principal to pay off your loan on schedule.

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Option 4: Build quick equity

For faster equity build-up, quicker payoff and substantial interest savings, choose the largest monthly payment option. Option 4 is calculated to amortize your loan based on a 15-year term from the first payment due date.

Cash Flow Option ARM

An issue for many homeowners is in managing your monthly income and expenses, generally referred to as "cash flow". Income can vary on a monthly basis for many reasons and unplanned expenses of many kinds can come up when we least expect it. For many of us, our mortgage payment is our largest monthly expense, but it is also the least flexible. The Cash Flow Option ARM was designed to give you greater control over your mortgage payment. You have the option of choosing one of four payment options each month based on your specific cash flow needs at the time.

Interest Only Payment Defer paying principal on your loan and improve your monthly cash flow. The money you save improves your cash flow. This option is not available if the interest only payment would be less than the minimum payment.

Minimum Payment A payment that is set for 12 or 60 months at a greatly reduced rate. The minimum payment rate for the 12 month option is currently at 1.25% (yes, 1.25%!) and the 60 month option is at 1.95%. This option not only maximizes cash flow but may also defer payment of interest on your mortgage allowing greater flexibility in managing your tax deductions. Plus, this minimum payment can not increase by more than 7.5% each year except when your loan is recast every five years or when your balance exceeds 110% of your initial loan amount.

 

Fully Amortizing Payment Options You have the ability to make a principal and interest payment based on either a 30 year or 15 year payment schedule. I have included a Cash Flow Option ARM statement as well.

The Cash Flow Arm series allows you to choose your index based on your own needs. You can chose from the 1 month LIBOR (London Interbank Offered Rate) or the MTA (12 Month Treasury Average).

Here is a 10 year average comparison between a 30 year fixed and fully indexed LIBOR, MTA, COFI, and the 1 year Treasury Index.

Fixed 7.710%
T Bill 7.708% average of 4.833 with a 2.875% margin
COFI 7.490% average of 4.590 with a 2.9% margin
MTA 7.442% average of 4.942 with a 2.5% margin
LIBOR 7.102% average of 4.852 with a 2.25% margin

Here is the above data in chart form.

Additional Options If you are looking for the additional security of a fixed payment while still taking advantage of the extremely low Cash Flow ARM interest rates, there is also a 5 year fixed payment option. With the Cash Flow ARM 5 year Fixed Payment Mortgage, you are guaranteed a fixed minimum payment for the first five years. You still have the four payment options to select from monthly to manage your cash flow. And, with each of these loans, you also have the ability to increase the term of your loan from 30 to 40 years lowering your payment even further.

The Minimum Payment Advantage The example below is based on a $400,000 mortgage. It compares a traditional 30 year fixed rate payment based on the above 10 year average to the minimum payment available on the Cash Flow ARM again based on the 10 year average. Assumes that the Minimum Payment increases by the maximum 7.5% per year.

30 Fixed Cash Flow Minimum Monthly Savings Annual Savings

Year 1 $2,855 $1,633 $1,222 $14,660
Year 2 $2,855 $1,755 $1,099 $13,190
Year 3 $2,855 $1,887 $986 $11,610

Savings over 3 years $39,450
Savings invested at 8% $44,704

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Consider an Option ARM if:
You have consumer debt (credit card debt, auto loans, etc)
You like to invest your spare cash
You want to manage your tax write-off
You’re self-employed or work on commission

With four options, you have more flexibility.

You’re better prepared to handle whatever comes up in life. And you enjoy these additional benefits: A low minimum payment that adjusts annually
7.5% payment cap that limits payment increases
A lifetime interest rate cap which protects you financially – there’s a limit to how high your interest rate can go.
Terms up to 40 years amortization available to help minimize your payment further.