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This mortgage calculator can be used to figure out monthly payments of a home mortgage loan, based on the home's sale price, the term of the loan desired, buyer's down payment percentage, and the loan's interest rate. This calculator factors in PMI (Private Mortgage Insurance) for loans where less than 20% is put as a down payment. Also taken into consideration are the town property taxes, and their effect on the total monthly mortgage payment.
How Does an Option ARM Loan Work?
Option ARM (also called Pick A Payment or Pay Option ARM) loans
work by providing the borrower with four payment options each
month.
Before we get into the payment options, let's review some of the
important terms and concepts involved with this loan program.
ARM - Adjustable Rate Mortgage. An ARM is a mortgage whose
interest rate is raised or lowered at periodic intervals
according to the prevailing interest rates in the market. Also
called variable-rate mortgage.
Principle - The original amount of money provided in a loan is
the principle. This amount, plus the interest accrued must be
paid back in full by the end of the loan's term.
Interest - Interest is the cost paid to borrow the money.
Start Rate - The initial rate of the mortgage. This rate is the
rate that the "minimum" payment option is based on. Typically
this rate will range from 1-2%.
Amortization - The process of paying down the principle balance
of a loan. A fully amortized loan is a loan that will be paid
off completely through the monthly payments by the end of the
loan's term.
Negative Amortization - Negative Amortization or "neg am" is the
process of adding unpaid interest to the principle balance of
the loan. If you make a "minimum payment," the difference
between that payment and the interest only payment will be added
to the principal balance of your loan.
Index - An index is a measure of a particular security or other
monetary instrument that can be used to adjust interest rates.
Index examples include US Treasury Bond valuations, LIBOR
(London Inter Bank Offering Rate), COFI (Cost of Funds Index),
and MTA (Monthly Treasury Average). Indexes can adjust on a
daily basis.
Margin - Margin is the difference between the Index and the rate
on a loan.
Fully Indexed Rate - The fully indexed rate is calculated by
adding the Index to the Margin. For example, if Libor was 3.0%
and the margin on the loan was 2%, the fully indexed rate would
be 5% (Index + Margin). The fully indexed rate is the rate that
your loan accrues interest at.
Now that we've covered the basic terms, let's examine the four
payment options
These payment options are:
1) Minimum Payment This payment is a 30 year amortized payment
based on the start rate of the loan. When the minimum payment is
made, the difference between the minimum payment and the
interest only payment is added to the principle balance of the
loan.
This payment is lowest possible payment and lets you keep more
cash in your pocket each month. This payment typically changes
annually and is recalculated based on the remaining principal
balance of the loan, the remaining loan term, and the current
interest rate. A payment cap is usually applied to ensure that
they payment does not swing wildly from year to year. A typical
payment cap is 7%. For example, if your minimum payment was
$1,000 in year one, the most it would be in year two is $1,070
and the least it would be is $930.
2) Interest Only Payment This payment is based on the fully
indexed rate. These payments do not pay down the principal
balance of the loan.
In order to avoid deferred interest and negative amortization,
each month you will be given the option to make an interest only
payment. This allows you the benefit of keeping a low monthly
payment and keeps the principal balance of your loan at the same
amount.
3) 30 Year Fixed Payment This payment is based on the fully
indexed rate. These payments do pay down the principal balance
of the loan.
It's calculated each month based on the prior month's interest
rate, loan balance and remaining loan term. When you choose this
option, you reduce your principal and pay off your loan on
schedule.
4) 15 Year Fixed Payment This payment is based on the fully
indexed rate. These payments do pay down principal balance of
the loan.
If you want to build equity faster, pay off your loan quicker
and save on interest, this is the option for you. It's
calculated to amortize your loan based on a 15-year term from
the first payment due date.
Let's take a look at a couple of examples.
Example 1:
$250,000 Loan Amount - 1.25% Start Rate - 5.5% Fully Indexed Rate
Payment #1 (Minimum Payment) - $833.13 Payment #2 (Interest Only
Payment) - $1,145.83 Payment #3 (30 Year Payment) - $1,419.47
Payment #4 (15 Year Payment) - $2,024.71
Example 2
$450,000 Loan Amount - 1.25% Start Rate - 5.5% Fully Indexed Rate
Payment #1 (Minimum Payment) - $1,499.63 Payment #2 (Interest
Only Payment) - $2,062.50 Payment #3 (30 Year Payment) -
$2,555.05 Payment #4 (15 Year Payment) - $3,676.88
As you can see, there can be quite a difference between payment
options!
If you want to run your own scenarios, We've built a simple,
Excel based, Pay Option Calculator that you can download for
free. Check out the resource box below for information on how to
download this great little tool.
Hopefully, this gave you some insight into what an Option ARM
loan is and how it works.
If you are interested in learning more about this program, and
if you are eligible for it, your next step should be contacting
a mortgage professional.
IMPORTANT NOTICE
Beware companies or individuals that make you put money down or
order an appraisal BEFORE they agree to discuss your situation
with you. Also, be wary of those who won't talk to you until
they pull your credit report. While a credit report will be
necessary if you decide to go forward, you have the right to
talk to someone about your options before they look at your
credit. These are frequently just sales tactics to make you feel
like you are obligated to go forward with that particular broker
or lender.
About the author:
Joe Ramirez and HomeLoanInfoCenter.net put today's confusing
loan programs into easy to understand terms. Before you make a
decision to refinance or purchase, be sure to take advantage of
our free Pay Option ARM calculator. Visit us today to receive
free Refinance
information.