Option Adjustable-Rate Mortgage (Option ARM)

Unveiling Option Adjustable-Rate Mortgages (Option ARMs): A Comprehensive Guide

Option adjustable-rate mortgages (option ARMs) offer borrowers a range of payment options, allowing them to select from various payment structures each month. In addition to traditional principal and interest payments, borrowers can opt for interest-only payments or minimum payments, providing flexibility but also carrying risks.

Understanding Option ARMs

Option ARMs often start with low teaser rates, enticing borrowers with the promise of lower payments. However, once the teaser rates expire, borrowers may face significantly higher interest rates, akin to conventional mortgages. Moreover, opting for minimum payments can lead to an increase in the principal owed, as these payments may not cover the full interest amount.

Fact 1: Option ARMs were popular before the subprime mortgage crisis of 2007-2008, offering low introductory rates that often led to payment shock when rates reset. Source

Fact 2: The Consumer Financial Protection Bureau (CFPB) effectively eliminated Option ARMs in 2014 through new Qualified Mortgage (QM) standards. Source

Fact 3: Option ARMs have been cited as contributors to the housing crisis, as borrowers sometimes opted for minimum payments, leading to unsustainable debt levels. Source

Ways Option ARMs Are Paid

Borrowers with option ARMs can choose from various payment options each month, including minimum payments, interest-only payments, or fully amortized payments. While these choices offer flexibility, they also pose risks of increased long-term debt, particularly if interest rates rise or minimum payments escalate.