How Is The Interest Rate On An ARM Calculated

Adjustable rate mortgages generally operate in a particular way. There is a initial period during which the interest rate is fixed just like it is in the case of a fixed rate mortgage. This interest rate is usually much lower than what you get on a fixed rate mortgage. However the difference is that after this period is over the interest rate does not remain fixed as it does in the case of a fixed rate mortgage but is allowed to fluctuate according to the median index rate.

The initial interest rate period is for a much shorter time as compared to the entire length of the adjustable-rate mortgage. This period can typically range from one month to 7 years. In some cases of adjustable-rate mortgage the fixed interest rate may also be valid for the first 10 years but then the difference between the FRM and the ARM initial rate wil not be too great.

At the end of the initial rate period the rate rate is adjusted. The adjustment rule states that the new rate would equal the most recent value of a specified interest rate index plus a margin. For example if the index rate is 7% when the initial rate period ends and the margin is 2.5% than the new rate will be 9.5%. However this rule is also subject to two conditions.

  • The first rule is that the increase cannot exceed any rate adjustment cap that was specified in the adjustable rate for each contract. Usually all adjustable rate mortgages have a clause for a cap as to the maximum amount of increase that can happen in any particular year as well as the maximum amount of interest that can be charged at any point of time during the life of the mortgage loan. An adjustment cap Is usually one or 2% but in some cases can be as high as 5% per year.
     
  • The second condition is that the new rate cannot exceed the contractual maximum rate. As mentioned above in addition to the yearly cap on the interest rate there is also the maximum rate that the lender and charge the borrower at any point of time that the mortgage is in effect. Maximum interest rate are usually 5 to 6% over and above the initial rate that was offered.

After the initial rate period is over the interest rate is adjusted periodically. This period may or may not be the same as initial rate.. An adjustable rate mortgage may adjust the interest rate on annual, bi-annual or a monthly basis after the initial interest has ended.

The Quoted Interest Rate

The interest rate that is initially quoted on an adjustable-rate mortgage by the mortgage lender or in an advertisement is the initial rate and is known as the quoted interest rate.

Regardless of how long a period lasts. A borrower stands to see the maximum benefit if this initial rate lasts for a longer time. ARMs with initial low interest rate period of 3,5 and 7 years are common.

However, if the borrower intends to stay in the home after the quoted interest is over, then he needs to consider other factors like the rate index used by the lender as well as the margin rate used by him.

For example, the only significance of an initial rate on a monthly adjustable rate mortgage is that this rate may be used to calculate the initial payment.

The Fully Indexed Rate

The Index rate plus the margin rate is called the fully indexed rate for an adjustable-rate mortgage. The fully indexed rate based on the most recent of the index at the time that the loan is taken out indicates where the mortgage rate may end up when the initial rate period ends. If there is no change in the Index rate than the fully indexed rate will become the interest rate for the adjustable-rate mortgage till the time that the Index rate fluctuates.

For example, it is assumed that the initial rate on an adjustable-rate market is 5%. The fully indexed rate at that time is 7% and the rate adjustment is subject to a 1% rate increase cap. If the index remains the same the fully indexed rate based at the end of the second  year.

Your loan officer may or may not have the index rate available with him so you may not find out from them what the fully indexed rate is. Mortgage lenders are also not obliged to reveal this information to the borrower. However the most recent value of the index rates can be found on the Internet as long as you know which index rate your mortgage lender is tying up to your adjustable-rate mortgage.

What Is An ARM (Adjustable Rate Mortgage)

An adjustable rate mortgage refers to a mortgage where the interest rate can be changed by the lender according to certain terms and conditions contained in the mortgage contract.

While the adjustable rate mortgage in many countries abroad allow the rate to change at the lenders discretion, in the United States the rates changes are mechanical. The interest rate of an ARM is connected to an Index over which the lender has no control. There are different indexes, much like there are different stock market indices.

This index changes on global factors much like the stock market does. When the index changes, so does the interest rate on the ARM. However, the fluctuation is not quick and sudden. So do not expect constant changes in the interest rate.

These kind of adjustable-rate mortgages that are dependent upon an index rate in the world economy are called indexed mortgages.

A couple of common indexes used are COFI, six-month LIBOR etc.

Why It May Be Easier To Qualify For An ARM

It is easy to qualify for an adjustable-rate mortgage rather than a fixed rate mortgage for the simple reason that the qualification is mostly based on the initial payment that the borrower will be required to pay.

Since adjustable-rate mortgages offer a much lower initial interest rate than a fixed rate mortgage borrowers work with smaller income may qualify for this kind of mortgage even though the payments are slated to rise when the initial rate period is over.

For this reason you may find that adjustable rate mortgages become more common when the interest rate in the mortgage industry are on the rise.

Also with the underwriting becoming more stringent for mortgage loans people who would’ve qualified for a fixed-rate mortgage the past may need to go for an adjustable-rate mortgage in order to qualify.

However, if you are certain that you require fixed rate mortgage but find that you are only getting a qualification for an adjustable-rate mortgage you should know that you can probably qualify for a fixed-rate mortgage if you work a little harder on your application and do a little more research.

It also became common practice after the financial crisis that came about in 2007 to qualify borrowers using the fully indexed rate rather than the initial rate. If this practice would continue it would reduce the cyclical sensitivity in the market share of adjustable-rate mortgages relative to the fixed rate mortgages.

what is an adjustable rate mortgage

Reasons For Choosing An ARM

Taking an ARM when a fixed-rate mortgage is available is always a gamble. But it is a gamble that could be profitable in the long run. People typically choose an ARM over fixed-rate mortgage when they reasonably expect that the interest cost in total will be lower on the adjustable-rate mortgage than a fixed-rate mortgage.

The present ARM contracts have a cap on how high your interest rate and the mortgage payments can go. So in other words, you know what the worst case scenario could be. People take this into account and figure out whether they can meet this change comfortably if it happens.

People usually take ARMs for a couple of reasons. If the interest rates are high right now, they will gain when it comes back down. This does not happen with an FRM.

They are also willing to take on the gamble that in the long run, or for as long as they hope to posses the house, an ARM will give them better results.

It is highly recommended that you speak to her financial professional before choosing a adjustable rate mortgage to purchase your home.

  • An adjustable-rate mortgage has an initial low payment. The length of this period depends on the agreement between you and the lender.
  • If you want to sell the house in the near future, you can take advantage of the fact that an ARM usually has a lower rate of interest than any other mortgage, as decided upon between you and the lender.
  • The borrower expects to pay a lesser amount of money over the entire life of the adjustable rate mortgage. The only home loan where you can actually expect to pay lesser than what you signed up for, is the ARM. If the current home loans interest rate is high, it makes sense to go with an ARM. When the interest rates adjust in the future, you mortgage payment will go down along with it.

What Is Rate Index and Margin Rate

The rate index and the margin rate are two factors that determine the total interest rate on an adjustable rate mortgage. These are the two variables that control how the interest rate payable on the ARM fluctuates in the future, within the rate caps as per your loan contract.

ARM Index Rate

The index rate is an interest rate trends that lender uses to calculate the interest on the mortgages interest rate. Several rate indexes exist such as the six-month bank certificate of deposit. This is nothing but the interest rate on a savings certificate of deposit.

This index theoretically indicates how much it costs the bank to taking money. For example this is the amount that the bank has to pay back people who are investing money with it.

Lenders cannot control any of these indexes that we are going to discuss. Some of the common rate indexes are treasury bills, certificate of deposit, The 11th District Cost of Funds Index (COFI) and the London Interbank Offered Rate Index (LIBOR).

Some of these indexes are more volatile than others which means they are more sensitive to the fluctuations in the market. Generally more stable indexes are preferred by both the lenders as well as the borrowers.

ARM Margin Rate

The margin rate is also known as the lenders profit on the adjustable-rate mortgage. It is the markup he puts on the Index rate which is typically about 2.5%. However this amount will depend upon your lender.

If you’re comparing different mortgage lenders who use the same index, then the margin rate will be the deciding factor as to which mortgage lender is cheaper.

The total interest rate on your ARM is, Margin Rate + Index Rate.

This interest rate that includes the index as well as the margin is called the fully indexed rate and makes for a fully amortized payment on your mortgage. A fully amortized payment means that, if the rate remains constant, making that payment for the entire duration of the mortgage will pay off the home loan completely by the end of the term.

The interest rate on a mortgage can adjust on a monthly basis as well although most are just every 6 or 12 months. You should understand all terms and conditions from your lender. The less frequently your interest rate adjusts, the more stable your loan is.

Other ARM features you should know about

Recasting

Recasting is the recalculation and readjustment of your payments and interest-rate which a lender might do every five years.  When the five years are up the lender might add up your unpaid interest and add it to the principal amount of alone.  Based on this new amount your interest-rate or amortisation period may be recalculated.  If you have made large payments towards the principal amount of your loan recasting of a variable interest mortgage will result in lower future monthly payments.

ARM Lifetime Floor Rate

The lifetime floor rate in an ARM loan is quite opposite to the lifetime cap  it represents the minimum amount of interest below which your interest rate will never fall.  Even if the index rate in the market dips beyond a certain point the lender might set a limit on the interest rate beyond which your interest rate will not decrease even if the falling index rate in the market dictates it.

ARM Lifetime Cap

A Lifetime Cap is the maximum interests that the lender can charge the borrower on an adjustable rate mortgage.  If this amount is set to 10% in the interest-rate of your mortgage can never increase that amount in any particular month.  The lifetime cap Gives the consumer a certain amount of security and provides predictability against inflation in the future.  It makes consumers more inclined towards an adjustable rate mortgage as it gives them some idea of what to expect in the future.  It also helps the borrower decide whether or not he can afford to stay in the mortgage in the eventuality that the interest-rate might rise in the future.  A lifetime cap On the interest prevents the lender from charging unpredictable and wildly fluctuating rates on the mortgage in the future.

ARM Payment Cap

The payment cap Refers to the maximum amount that your monthly payment can increased to in the case of a adjustable rate mortgage.  This is usually represented by a certain percentage amounts that is added to the minimum payment.  If you have a payment cap of 5% and your minimum payment is $949.07 your payments cannot increase to more than $1020.2 a month in the following year.  Payment Cap is one of the safeguards that is implemented on an adjustable rate mortgage.  It is to safeguard the consumer from unprecedented and uncomfortably high payments being set in the future by the lender.  It is also a check on the lender that guarantees that he will not charge unreasonably high rates in the future once the customer has signed a contract.

What Is Negative Amortisation

Negative amortization is a typical feature of an adjustable rate mortgage.  Negative amortization happens when a variable-rate interest allows minimum payment options.  A minimum payment option stands for making a payment on your mortgage in a particular month that is less than the interest owed.  Since you are not even meeting the interest amount due on your mortgage in a month the lender adds the difference between your minimum payment and the full payment to the balance of your loan.  The more minimum payments you make the more balance you add to your loan amount.

The minimum payment is usually set according to the start rate of the variable-rate mortgage.  The start rate of a variable-rate mortgage is usually extremely low and can be as low as three to four per cent.  This means that on a $200,000 loan at the start rate of 3.95 per cent the minimum option payment would be $949.07 per month.  The full payment on the same amount at the rate of six per cent will be about $1199 per month.  This creates a difference of $250 between the minimum payment and the fully indexed payment every month.  For each month that you make a minimum payment lender will add $250 to the loan amount balance.

It is an equally obvious result that increasing the balance of your loan will increase the duration of the mortgage.  If you could pay off the mortgage in about 30 years earlier, additional balance to the loan amount will require you to stay in the mortgage for a longer time.  Since a regular and normal payments on a mortgage reduced the total term of the mortgage ( amortization period), the increase in the amortization period due to making minimum payments is called negative amortization.

How To Choose the Best Adjustable Rate Mortgage (ARM)

Shopping for an adjustable-rate mortgage is complicated. An adjustable rate mortgage program has several factors that make it a more complex matter. But its perfectly suitable for specific needs.

These are the points you should note down when comparing Adjustable Rate Mortgages.

Starting interest rate

Adjustable-rate mortgages typically start at a lower interest rate. This interest rate is locked for a certain promotional or temporary period of time. The longer this period is the more you can save on the ARM as compared to an FRM. However, longer this lock-in period of interest rate is, the higher the interest rate is going to be. This so-called low starting interest rate is often called the teaser interest rate.

The Rate Index Used

An ARM interest is tied to particular rate index such as interest rate on treasury bills or certificates of deposit. Knowing and understanding the particular index your cavernous title ii is critical. This is because one index may be more volatile than the others and if you study the trend over the past few years you would understand how the index rate for an ARM could fluctuate in the future.

Margin rate

The margin rate is the percentage that the lender adds to the index to determine your ARM’s fully amortized interest rate in the future. The margin rate is the profit for the lender so be sure to ask the margins on ARM that you are considering.

Periodic interest-rate adjustment limit

Most of the adjustable-rate mortgage is adjusted every 6 to 12 months. A good adjustable-rate mortgage has a limit on the amount that the interest rate can increase every year. This should be mentioned in the promissory note and the contract of the mortgage.

Lifetime interest rate limit

A good adjustable rate mortgage limits the maximum interest rate allowed over the life of the loan. For example if the lifetime limit is 5 to 6%, you will never be charged more than 9 to 10% on a mortgage that had an initial rate of 4%.

Negative amortization.

You should ask if your adjustable rate mortgage has negative amortization. Negative amortization can happen if your adjustable-rate mortgage has a limit on how much the monthly payment can increase but not on how much interest rate can increase.

This means that if the interest-rate increases greatly, your maximum monthly payment may not be enough to cover the entire interest payment. This interest will be added to the balance of your adjustable rate mortgage and hence result in your loan balance increasing rather than decreasing in spite of regular monthly payments. This is an extremely toxic feature and we highly recommend avoiding an ARM with this condition set in the contract.

Contact information.

You should always have the phone number that you can call in case there are any questions or problems in the future. This number should not be just a call center number for a large institution. It should be the number of the person you ultimately interview for a direct phone number, fax number and e-mail address.

Details of the person you deal with

But in most cases you’ll be dealing with a loan officer from the lending institution. This is the person that you should be able to call and check up with regarding the progress of your loan of to complain if the process is moving as expected.

Loan processor

A loan processor is the person who handles all the paperwork concerned with the loan from the time that you submit your application to the time the loan is closed. Loan processor’s jobs includes everything from conducting credit investigation to preparing loan documents that you will sign. If possible get the loan processor’s direct phone number, fax number and e-mail address.

Dates

If any problem arises in the future dates could prove important.

Loan program name

If the mortgage lender has a particular name for the mortgage they are qualifying you for, you should have that name. It makes for easier reference.

Points

As we have discussed earlier what is the number of points that are being charged for a particular interest rate. A quote of an interest rate without a quote of points is quite meaningless.

Fees

Ask the lender to identify and itemize all lists of fees and charges that are applicable to your loan application such as processing fee, credit report, appraisal fee and others.

Required down payment

You should ask the mortgage about down payment requirement. In most cases you’ll be required to make at least 20% to avoid taking the private mortgage insurance. However, if you’re agreeable to taking private mortgage insurance you can have a downpayment as less as 5 to 10%.

However, this is rare with regular mortgage lenders. To find lower down payments limits, one can usually do better with an FHA mortgage. If you cannot make 20% down payment and don’t want to take the private mortgage insurance and you can utilize the 80-10-10 financing technique that we have discussed earlier.

Loan amount allowed

Posted on case and does have different slabs of terms and conditions that apply to different levels of borrowing. Getting a certain interest rate and terms and conditions that you like is no good if you are not being lent to amount your need. Ask the lender how much amount he is willing to give.

Term

What is the term of the mortgage that you are qualifying for? Or the terms and the interest rate valid for the 30th or 15 year mortgage. The interest rate on a mortgage to different towns also tends to defer.

Prepayment Penalties

We strongly urge you to avoid a prepayment penalty clause in your contract. Ask a mortgage lender if there is any prepayment penalty clause in your home loan-counseling out. The lender is bound to get this in the truth in lending disclosure form that is handed over to the borrower.

Is the loan Assumable?

Finding an assumable home loan is quite difficult in today’s date. All VA loans are assumable. With an assumable loan, the borrower can pass off the mortgage to the person when he sells his house. The mortgage continues on the same terms that were applicable for the first home owner.

Estimated monthly payment

How much are you going to pay each month for a mortgage? 

 

Understanding Adjustable Rate Mortgages

ARMs can be complicated contracts. Its a great idea to seek professional and trustworthy advice before choosing an adjustable rate home loan. In some places, ARMs are the only option available for a home loan.

Read this post to understand nuances about this peculiar home loan contract.

Constantly Changing Interest Rate

Adjustable rate mortgages also come in many forms. But the basic feature is that the interest rate is tied to a rate index. This index fluctuates with the market conditions. So if the interest rate in the market is high the interest rate on your adjustable rate mortgage is also going to rise. If this index decreases than the interest rate on your mortgage will also come down. Subsequently, your monthly mortgage payment will also increase or decrease with the reducing or increasing interest rate. Read more about how the mortgage payment is calculated here.

Hybrid Combination Home Loan – ARM and FRM.

As mentioned before even adjustable rate mortgages come with various plans. Some adjustable rate mortgages have a certain period of fixed interest rate which could be 3, 5, 7 and even up to 10 years. These are usually known as hybrid ARMs.

It is common for adjustable-rate mortgages to usually have a promotional fixed interest rate period of 1 to 6 months only. After that the interest rate can adjust every 6 months or 12 months and even monthly. What feature and plan your adjustable rate mortgage has will depend upon what your lender has to offer.

But the basic feature for an ARM is that the increasing interest rate will increase the size of your mortgage payment and conversely when the interest rates decrease the payment on your mortgage will decrease eventually as well.

The Effect Of Economic Conditions

The effect of market conditions is usually not instant with an ARM. This also depends on the volatility of the index that the mortgage is tied to. The more volatile the index the more quickly it will react to market conditions. While this is good when the interest rates are falling, it is not so beneficial when they are rising. People use a more stable rate index for their ARM. The COFI index is popular with both the borrowers and lenders.

The biggest risk with an ARM mortgages is its unpredictability for future payment situation. A mortgage payment is probably one of your biggest monthly expenses and an increase in it all of a sudden can throw your monthly budget completely out of whack.

An ARM has a serious potential to disturb your financial stability if you have not given it adequate thought. Many people have made the mistake of choosing an ARM because of the initial low interest rate.

Borrowing Large Amounts 

The lower interest rate enabled borrowers to qualify for a larger sum of money to borrow.

However as we keep on repeating, the amount that you can qualify to borrow from the mortgage lender is not the same that you can afford to pay back. If you are still unsure about how much mortgage you can afford you should go back to the affordability section.

Saving Money With Adjustable Rate Mortgage

The correct reason to choose an adjustable rate mortgage is to save money on interest charges over the long run. The only condition in which you should take an adjustable-rate mortgages if you are able and ready to accept the risk of a higher mortgage payment in the future.

Many mortgage lenders qualify the borrowers today on the basis of the maximum amount that an interest rate mortgage can reach. Because the borrower is willing to accept the risk of an increase in the mortgage interest rate with larger payments, the mortgage lenders are willing to give a lower interest rate in the beginning.

However, typically, a borrower should expect to come out ahead in an adjustable-rate mortgage if he sticks out the payments throughout the entire town. Most of the borrowers bailout when the interest rates get high and to not wait for them to come down again. The starting interest rate on an ARM also called a teaser interest rate should be significantly lower than the interest rate on a comparable fixed-rate mortgage. In fact even with subsequent rate adjustments the interest rate on an FM should be n and FRM for the 1st couple of years.

Another tangible advantage of an ARM is that if you are purchasing your home and the interest rates are high, you can typically find lower interest rates on an ARM. By the time the fixed interest rate period is over the interest rates might have fallen and you can continue to enjoy the lowered rates.

No Need To Refinance

When you take out an ARM you do not need to refinance when the interest rates are lower. If the interest rates decrease, your ARM will probably adjust to the lower interest rate and monthly mortgage payment goes down on its own. This is not something that a person with a fixed-rate mortgage can take advantage of.

A person who has an FRM will need to refinance in order to lower the interest rate on his home loan. Many times a person cannot qualify for a refinance for various reasons like lower equity in the property etc. Plus there are expenses to incur with refinancing. Many of the closing costs such as appraisal, loan origination charges etc. that were present when taking out the mortgage will be applicable during refinance as well.

If the current mortgage lender is not willing to refinance at the best rates, then the borrower will need to go shopping for a home loan all over again. Prepayment penalties might also come in to play. Just a reminder, always try to avoid a mortgage that has a prepayment penalty clause. We have spoken about this in depth before.

Disadvantage Of An ARM

An adjustable rate mortgage is not without its downside. The disadvantage of an ARM is that if the interest rate rise sharply so will your monthly payment. If the economy conditions dictate that the interest rate rises more than one or 2% and stays elevated for a reasonably long period of time, an adjustable rate mortgage is likely to cost you more than a fixed-rate mortgage.

However, 2 scenarios usually outweigh this potential setback. 

  1. You get a good introductory rate and you don’t intend to keep the house for a long time. That way you can sell and move on before the interest rates have a chance of shooting up and increasing your monthly payments.
  2. You keep the mortgage for the entire tenure, even through the patches of high interest rate. In the long run, the highs and lows tend to average out to give you a better overall return than an FRM. Plus, as we have mentioned, you will never have to incur costs of refinancing when the interest rates fall. Your mortgage will automatically adjust.

 

What Is A Hybrid ARM Loan

With the hybrid mortgage loan you can take advantage of the features of a fixed-rate mortgage mixed with the advantages of having our adjustable-rate mortgage. This is useful for people who are going to be staying in their homes for a short amount of time and who happen to know beforehand how long they are going to be holding on to the mortgage.

The hybrid loan usually is an adjustable rate mortgage that has a fixed interest rate. Of 3 to 10 years. Usually an ARM has the fixed interest rate duration of a few months but in our case of a hybrid loan this is much more. Some of the common variations hybrid ARMs are 3/17, 5/25, 7/23, 10/20.

The 1st figure states the duration during which the interest rate stays fixed. These kind of hybrid loans are preferable to a fixed-rate mortgage because even hybrid ARMs usually start with an interest rate that is much less than a fixed rate mortgage. However since the initial rate is locked in for a longer period of time, the interest rate is going to be slightly higher than the typically ARM where the lock-in period is only a few months.

Saving money on a hybrid ARM hinges on the fact that you will move out of the house when the fixed rate interest duration is over. If you intend to stay in the house for longer than that then perhaps you would be better off with a fixed-rate mortgage.

Generally, the rule of the thumb is that if you intend to stay in the house for less than 5 years, you can come out ahead with an adjustable rate mortgage and save money as compared to fixed rate home loan.

It also depends upon the difference between the interest rate being offered on the ARM as compared to the FRM. There are times when the difference between the 2 is minuscule whereas others when the difference between them is more than 1%. If the difference between the 2 kind of mortgages is very less than a fixed rate home loan could probably offer you better value with more peace of mind with its consistency and stability.

Different Payment Options On an ARM

Intrest Only Payment On ARM

Interest only payment is provide by some lenders for mortgages and is most common for the adjustable/ variable rate mortgage loan types. As the name suggests, this option allows to pay only the interest on a mortgage in any month. the lender also might set a period during which the consumer can make the interest only payment. However, unlike the Minimum Payment Option, the Interest Only payment option lasts through the term of the Adjustable Rate Mortgage if included in the terms and conditions.

A interest only payment towards the mortgage helps during the times when the borrower needs extra money for other expense. During all the months that the borrower pays just the interest, the amount of the loan remains unchanged. The borrower is expected to make the full payment on the mortgage when the mortgage is due for maturity or when the term of the interest only payment option is drawing to a close.

At 6% interest on a $200,000 loan this payment would be about $1000 per month.  Since the interest-rate adjusts on a monthly basis after the start rate is over this amount could change from month to month in the case of a ARM Loan.

Fully Indexed Payment On ARM

Any lender calculates the interest he want to charge the borrower by adding the margin rate to the index rate. In case of a variable rate mortgage, the fully indexed rate will vary because it will be adjusted to the index rate the lender uses. An index rate changes and is published every month from various sources.

At 6% fully indexed on a $200,000 loan and payment will be about $1199 per month.

As long as you make fully indexed payments on your mortgage, your principal balance will reduce and so will the interest you pay on it every month.

Paying the fully indexed payment every month is a sure way of finishing your mortgage in the stipulated amortization period.

Usually all kinds of loans require you to make the fully indexed payment every month, ARM loans and credit card balances being an exception to this.

Minimum Option Payments On ARMs

Just like a credit card, when you take a adjustable rate mortgage, a lender fixes a minimum payment for your mortgage. he also fixes a period during which you can make the minimum payment on your mortgage. anytime during this period, you can make the minimum payment on your ARM rather than the full payment. This period ranges from  one to five years usually.  This minimum payment is less than the full interest payment.

The minimum payment is set according to the start rate of an ARM loan. This is usually a very low interest rate that can be as low as 3%-4%. On a $200,000 loan at the start rate of 3.95% the minimum option payment would be $949.07 per month.  This option is a good option for a person whose income fluctuates monthly.

Having the ability to make minimum payments can help you to stay in your mortgage without defaulting when facing slim financial times or with sudden heavy expenses. Making minimum payments also increases the balance of the loan amount. since the minimum amount is less that the interest due and does not include any payment towards the principal sum owed, the difference between the minimum payment and the full payment is adds to the loan balance. This increases the balance due as well as the amortization period of the mortgage, which is what leads to negative amortization period.