Option ARM Mortgages - How they Work and Pros and Cons by:Grant Eckert

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In the world of mortgages and complex financial arrangements for housing

, you need to be armed with the facts. Not knowing what you are getting into when you sign on the dotted line(s) could end up hurting you more than helping you. In the case of option ARM mortgages, this is especially the case. Not only are they extremely complicated, but when you're not sure what they can do for you, they can be a painful learning experience.

The basic appeal of an option ARM mortgage is that you don't have to make large payments in the beginning. These are the loans you may have seen on website banners advertising $200,000 loans for only $500 a month. This does sound good when money is tight and you want to conserve the bills you have. But in actuality, you will still be borrowing a certain amount of money that needs to be paid off. And while the bills are low in the beginning, they will begin to increase over the duration of your loan period.

Another thing to consider with option ARM mortgages is that the interest rates can soar or they can plummet, depending on the market and the terms of your loan. Though you might be only paying $500 a month, your loan amount may be increasing without you even realizing it. And once you're out of that initial low payment period, you may need to double or even triple the amount you are paying every month.

You can choose between several different payment plans each month with an option ARM mortgage. You might pay typical payments that include both interest and the principle, or just payments that are interest. You might also choose to limit your payments so that you're paying the least amount possible - however, this is not going to help with the overall amount as interest will continue to be added to your loan amount.

In the beginning months, you will also generally be offered a low interest rate, which will be appealing and cause your payments to be lower. But while this introductory interest period seems appealing, it is not going to last. Be sure to ask how long this low rate is going to last, if you hear that it's only a month or two, it might not be worth it to you. After the introductory period, the interest will rise to the normal rates.

When you pay monthly and only pay the minimum payment, you will not necessarily be paying down your overall loan because the interest rate will continue to add money to the balance. After a while, your payments may not be covering any interest that you have accrued or even helping with the principle, adding up to a large sum that you now have to pay down.

Another thing to consider is that after five years or so, the loan can be recalculated, which can lead to substantial increases in your monthly payment. This can be shocking to the borrower, but it will be clearly outlined in the option ARM payment fine print.

So, the question becomes - are the option ARM mortgages good for anyone? If you don't have a lot of money now, but you can be certain that you will in the future, this might be a good option for you. But if you're not going to keep up with your current low payments and aren't adding any additional money that you could to the payment plan, you might be setting yourself up for a financial disaster.

But the main concern is that those that do not do their homework on the loan will end up being 'surprised' when it comes time to pay off their larger bill. Do yourself a favor and make sure that you are reading the fine print and that you understand what is expected of you.

About the author

Grant Eckert is a writer for ShopRate.com. ShopRate.com is a leading provider of http://www.ShopRate.com Mortgage Quotes | Mortgage Rates

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