Option ARM, Interest-Only, I-O, MortgageDo you know what to ask when shopping for an Interest-Only (I-O) mortgage payment or a payment-option ARM?

You will when you use the Mortgage Shopping Worksheet  (pdf). It’s important you know the details of every mortgage product you are considerring and the different options they provide. Don’t be afraid to ask questions until you fully understand the details.

If you are working with a lender or broker that can’t or won’t provide ALL the answers to the questions in the Mortgage Shopping Worksheet  (pdf)…RUN!

Not only is it critical you get a mortgage that’s affordable today, it’s imperative you get a mortgage that allows you to buy/refinance the house and continue to afford the payments, even if payments go up over time or be in a position to refinance into a more financially favorable mortgage if warranted.

Below is an example of the Mortgage Shopping Worksheet  (pdf). 

  Example Mortgage 1 Mortgage 2
Name of lender or broker & contact information ABC Mortgage Co.
800-123-4567
___ ___
Mortgage amount $180,000 ___ ___
Loan description Payment-option ARM; 1-month introductory rate; 30-year term ___ ___
Is this an I-O payment or a payment-option ARM? Payment-option ARM ___ ___
If different payment options are available, what are the options? 1. First year’s minimum payment based on initial interest rate
2. Interest-only payment based on rate after adjustment
3. Fully amortizing payment based on 30-year term
___ ___
What is the full term of the mortgage? 30 years ___ ___
How long is the option period? The loan will be recalculated (recast) every 5 years. Payment options are available every month except (1) when loan is recast every 5 years, (2) when balance is 125% of original loan, or (3) if you fall more than 60 days behind in your payments. ___ ___
What is the initial interest rate? 1.6% ___ ___
For a payment-option ARM, how long does the initial interest rate apply? 1 month ___ ___
What will the interest rate be after the initial rate? 6.4% ___ ___
How often can the interest rate adjust? Monthly ___ ___
What is the periodic interest rate cap? 2% per year ___ ___
What is the overall interest rate cap? 6% lifetime cap (maximum interest rate is 12.4%) ___ ___
How often will the monthly payments adjust? Annually ___ ___
What is the payment cap? 7.5% per year;
does not apply to recalculation every 5th year
___ ___
Can this loan have negative amortization? Yes ___ ___
Is there a limit to how much the balance can grow before the loan will be recalculated? Up to 125% of original amount borrowed (loan will be recalculated if balance grows to $225,000) ___ ___
Is there a prepayment penalty if I end this mortgage early by refinancing or selling my home? Yes ___ ___
How much is the penalty? 3% of amount borrowed in 1st year ($5,400), down to 1% of amount borrowed in 3rd year ($1,800); no prepayment penalty after year 3 ___ ___
What will my monthly payments be for the first year of the loan? $630 ___ ___
Does this include taxes and insurance? Homeowner’s association fees? No ___ ___
What is the most my minimum monthly payment could be after 12 months? $677
(based on 7.5% cap)
___ ___
What is the most my minimum monthly payment could be after 24 months? $728
(based on 7.5% cap)
___ ___
What is the most my minimum monthly payment could be after 36 months? $783
(based on 7.5% cap)
___ ___
What is the most my minimum monthly payment could be after 48 months? $2,491
(based on recalculation of the loan when balance is $225,000)
___ ___
What is the most my minimum monthly payment could be after 60 months (5 years)? $2,491
(based on recalculation of the loan after 4 years)
___ ___
What would my minimum monthly payment be after 60 months (5 years) if the interest rate stays the same? $1,308
(based on recalculation of the loan after 5 years)
___ ___
What are the fees and charges due at closing on this loan? See good faith estimate ___ ___

 Links to previous articles in this series:

Interest-Only Mortgages and Option-Payment ARM’s: Part 1

______________________________________________

Tony Gallegos – Serving the mortgage needs of Kennesaw, Marietta, Roswell, Smyrna, Powder Springs, Dallas, Acworth, Woodstock, Douglasville, Hiram, Austell and Atlanta. Subscribe to The Mortgage Cicerone:

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