Understanding Features of an Option Adjustable Rate Mortgage

Interest rates as low as 1%! Apply now!

Ever seen an ad such as this? While it’s not lying - because an option mortgage loan really does come equipped with low, low initial rates - make sure you read on.

An option home loan is a type of adjustable rate mortgage … but the interest rates adjust EVERY month. So that figure you see in the advertisement may just be a teaser.

If you’re considering these options, however, consider a couple features of them:

Margin: The Most Important Feature of an Option ARM
The option ARM adjusts the rate monthly. In month two and every subsequent month, the rate is set to equal the most recent value of the rate index, plus a margin.

For example, assume your adjustable rate home loan uses MTA as the index and your margin is 3%. In May, 2005, MTA was 2.633%. If your first month with this loan was May, in June your rate would jump from 1% to 5.633%.

The margin is fixed for the life of any one loan, but it varies widely between borrowers. That’s why it should be the first thing you look for. Lenders often don’t volunteer it, so be sure to inquire.

Maximum Rate on an Option ARM
There are no rate adjustment caps on an option ARM. The only limit set on the rate is a maximum over the life of the contract. You should try and look for a maximum of about 10%, but it can vary some from lender to lender.
Be sure to ask about both these features when consider such an adjustable rate mortgage. And remember: read the fine print. Exceptionally low mortgage rates typically are too good to be true.