3. Payment-option ARM
If you opt for a payment-option adjustable-rate mortgage, you can pick your own payment structure and schedule, like interest-only, a 15-, 30-, or 40-year term, or any other payment equal to or greater than the minimum payment, which is based on the standard 30-year amortization with the initial mortgage rate.
This option may, however, result in negative amortization, which means the balance of your home loan increases because you are not paying enough to cover the interest. If the balance increases too much, your mortgage lender may recast the loan and require that you make more significant payments, which may become unaffordable. It is important to weigh that risk when choosing a payment-option ARM.
Whether an adjustable-rate mortgage is a good idea for you will depend on your financial goals and your ability to handle risk. However, the first and most important you may want to ask yourself is how long you plant to live in the home.
If you sell your property or pay off your mortgage before the adjustable rate increases, you will end up saving money. If, on the other hand, you want to settle in for the long term and require the certainty of a consistent mortgage rate and monthly payment, then a fixed-rate mortgage would likely be a better idea for you.
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