Define: Option Arm

An Option Arm, short for Option Adjustable-Rate Mortgage, is a type of mortgage loan that allows borrowers to choose from different payment options each month, including a minimum payment, an interest-only payment, or a fully amortizing payment.

With an Option Arm, borrowers have the flexibility to make different payment choices each month. However, if they choose to make the minimum payment or an interest-only payment, the unpaid portion of the interest is added to the loan balance, resulting in negative amortization.

The main advantage of an Option Arm is the flexibility it offers in terms of payment options. Borrowers can choose a lower payment when they are facing financial difficulties and switch to a higher payment when their financial situation improves.

The primary risk of an Option Arm is the potential for negative amortization. If borrowers consistently make minimum or interest-only payments, the loan balance can increase over time, leading to higher monthly payments in the future.

Option Arms are subject to various legal regulations, including disclosure requirements, to ensure that borrowers fully understand the risks and terms associated with these loans. Lenders must provide clear and accurate information about the loan terms, payment options, and potential negative amortization.

Refinancing an Option Arm is possible, but it depends on various factors such as the borrower’s creditworthiness, loan-to-value ratio, and current market conditions. It is advisable to consult with a mortgage professional to determine the feasibility of refinancing.

Some lenders may offer options to convert an Option Arm into a fixed-rate mortgage. However, this conversion may come with certain conditions and fees. It is essential to review the loan agreement and consult with the lender to understand the available options.

In most cases, borrowers can make extra payments on an Option Arm. However, it is crucial to check the loan agreement for any prepayment penalties or restrictions that may apply.

Defaulting on an Option Arm can have serious consequences, including foreclosure. It is essential to contact the lender as soon as possible if you are facing financial difficulties to explore potential alternatives, such as loan modification or refinancing.

If you believe that your lender misled you about the terms of your Option Arm, you may have legal recourse. Consult with an attorney specializing in mortgage and consumer protection laws to evaluate your case and determine the best course of action.