We use cookies to improve security, personalize the user experience,
enhance our marketing activities (including cooperating with our marketing partners) and for other
business use.
Click "here" to read our Cookie Policy.
By clicking "Accept" you agree to the use of cookies. Read less
What is an Option ARM? A Comprehensive Guide to This Mortgage Type
Definition & Meaning
An Option Adjustable Rate Mortgage (Option ARM) is a type of mortgage loan that allows borrowers to select from multiple payment options each month. The interest rate on this loan is periodically adjusted based on various financial indices. Borrowers typically have four payment choices:
A minimum payment based on the initial interest rate
A payment that covers only the interest accrued during the month
A fully amortizing payment spread over 30 years
A fully amortizing payment spread over 15 years
This flexibility can be beneficial, but it may also lead to increased debt if the minimum payment does not cover the interest accrued, potentially resulting in negative amortization.
Table of content
Legal Use & context
Option ARMs are commonly used in real estate transactions and mortgage financing. They fall under the category of adjustable-rate mortgages (ARMs) and are relevant in civil law, particularly in real estate and contract law. Legal professionals often deal with Option ARMs in the context of loan agreements, disclosures, and borrower rights.
Users can manage some aspects of Option ARMs using legal templates from US Legal Forms, especially for disclosures and agreements related to mortgage loans.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A borrower chooses the minimum payment option on their Option ARM. If the interest accrued exceeds the amount paid, the unpaid interest is added to the principal balance, increasing the total debt.
Example 2: A homeowner opts for a fully amortizing 30-year payment, allowing them to pay off their loan over a longer period, which may result in lower monthly payments but higher total interest costs over the life of the loan.
State-by-state differences
Examples of state differences (not exhaustive):
State
Key Differences
California
Option ARMs were popular before the housing crisis, leading to stricter regulations post-crisis.
Florida
Increased scrutiny on lender practices regarding disclosures for Option ARMs.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Adjustable Rate Mortgage (ARM)
A mortgage with an interest rate that can change periodically.
Option ARMs offer multiple payment choices, while standard ARMs typically do not.
Fixed Rate Mortgage
A mortgage with a constant interest rate throughout the loan term.
Fixed rate mortgages do not have adjustable payments or interest rates.
Common misunderstandings
What to do if this term applies to you
If you are considering an Option ARM, it's essential to understand the implications of your payment choices. Carefully review the terms of your mortgage and consider consulting a financial advisor or legal professional to ensure you make informed decisions.
Users can explore US Legal Forms for ready-to-use legal templates that can assist with mortgage agreements and disclosures.
Find the legal form that fits your case
Browse our library of 85,000+ state-specific legal templates.