Are Payment Option Mortgage Loans Worth The Risk? - Payment option mortgages are all the rage in high priced coastal neighborhoods in California, Hawaii and Florida. With million dollar purchase prices for homes up and down the coast, borrowers need a loan that can help them qualify for their high priced dream home. Many new homeowners have found the "payment option ARM", a loan that gives the consumer several choices each month for paying their mortgage back.

This popular loan allows homeowners to make a payment for less than the interest accrued, and the loss of interest is added to the principal of the loan later. One major concern of the option arm mortgage is the restrictions for future subordinate financing. Frequently when people buy a home they don't anticipate that they will need a second mortgage or home equity loan. The irony is that many of these borrowers are starting off with an adjustable rate second mortgage or line of credit.

By Rita Cook

Negative Amortization also known as "payment option ARM" means that the borrower is not actually paying the full amount of interest that is owed on a monthly basis. The main reason a loan like this is taken out is so the borrower can afford the monthly payments and this sort of flexibility can really make a difference.

Most often nowadays when a person chooses a negative amortization loan it will be an adjustable rate mortgage also known as an ARM. In actuality this means that the mortgage payment will be fixed for a particular period of time, but over the years the rate will go up or down depending on the market.

At mtgprofessor.com they note that "Flexible payment adjustable rate mortgages, usually called "option ARMs" are the fastest growing mortgage in the marketplace - and also the least understood." It is always a good idea to make sure you ask the person giving you the loan if the amount will change monthly and if there will be negative amortization.

At the Lending Tree website, lendingtree.com one type of poplar option arm, the flex-ARMs, is explained as an adjustable rate mortgage with a twist. "You don't pay a set amount each month. Instead, the lender sends a monthly statement with up to four payment options. You tick off the amount you want to pay."

This can eventually lead to a term known as "payment shock," often felt by borrowers who choose the payment option ARMs and negative amortization. This is because various things can happen during the life of your monthly payments. In some cases you might have a five year adjustable rate that is fully amortized. You don't have to worry about payment changes for at least five years, but at this point you are at the mercy of new interest rates.

The five year adjustable interest only mortgage again means you don't have to worry about your payment changing for at least five years, but still you are at the mercy of new interest rates. There might also be higher payments added to go toward the principal for the next 25 years.

The negative amortization mortgage usually allows for the same monthly payment for five years, however if the becomes more than 15% of the original amount you will likely see a payment increase.

Whatever type of payment option you choose be sure to ask questions so that you will know just how much your payments could increase. With all the different choices out there for mortgage loans, there is certainly one that is right for you.

According to Freddie Mac, "88% of homeowners who refinance their homes in the 1st quarter got a mortgage at least 5% larger than their first loan." Since this was the largest increase since 1990, and the Fed continues to increase key interest rates, it is my contention that the demand for cash and the ability to finance quickly is the greatest it has been since World War II.

"The reality is that some people still believe the interest rates are below 6%,"said John Allen from Laguna Beach California. John continued, "If I need cash for home improvements. Why wouldn't I just take out home equity loan since my first mortgage rate is under 5%." John's mentality mirrors many of my borrowers' frames of mind of late. Consumers are much more educated than they used to be about financing and taking out second mortgages.

Combined Loan to Value (CLTV)

• 95% CLTV on Refinance Loans to $750,000
• 80% CLTV on Refinance Loans to $1,800,000
• 90% CLTV on all Home Purchase Loans

Payment Options:

• Principal & Interest (Fully Amortized Payment )
• Interest Only Option
• Negative Amortization Option
• Option ARM MTA
• Option ARM COFI
• Option ARM CODI

1.25% Introductory Rate

Terms: 30 40-Year Amortization
Cash Out: unlimited
Documentation Options: Stated or Full Doc