Can anybody tell me wht they think about Option ARM Minimum payment plan for refinancing home loans?

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Trying to refinance my mortgage to keep my home during my divorce. Is this a smart move or very stupid?…Thanks!

I have a 15 year mortgage on my house which I’ve been paying on for about 7 months. Its fixed at 6.74% APR. Initial amount borrowed was $ 65,016.24 and now I owe $ 63,674.81 after 7 months of payments. (my payment is $ 574.42 per month) My bank now is advertising a home equity installment loan for up to $ 10,000 at 4.99% APR. The question I have is would it be smart to take out this loan and pay off $ 10,000 of my original mortgage with the money since it is at a lower rate (4.99 vs 6.74)? In other words I’m not looking to use the money for anything other than paying off a large chunk of my mortgage in the hopes of saving some money over time. ps. I’m pretty sure there are no ‘closing costs’ involved with the home equity loan.

  1. Reply
    April 29, 2011 at 9:32 pm

    It really depends on your financial situation, but yes there are many benefits with an Option ARM program…

    This particular loan option is perfect for someone who needs the added flexibility of multiple payment options on a monthly basis…

    If when going through your divorce, it is going to be hard to make a full prinipal and interest payment, then having the interest only, and ESPECIALLY the MINIMUM payment option makes alot of sense…

    On top of that, depending on the lender you are working with, you can get an Option Arm that is based off the T Bill, rather then a traditional ARM loan that is usually a libor based product…

    What that boils down to is the T bill has been very stable over the past 10 years.. The rates don’t move naywhere near as wuickly as what you see on a Libor Arm.. The Libor ARM has been increasing steadily over the past few years…

    In all, yes the option ARM can be a great program if it suits what you need.. (lower payment options)

    For someone that simply wants to pay the house off as soon as possible, an option ARM program may not be the best bet..

    Now, do you have financing lined up? Are you currently working with a mortgage broker? I ask because i wonder why he/she hasn’t explained the pro’s and con’s of an option ARM progam..

    If you are open to seeing hwat you qualify for, ill let you knwo that I work with multiple investors.. Each have their own versions of the Option Arm (all absed off T Bill) Some have low start rates, others have a very common 50% of your P&I Payment = your Minimum payment… (Most companies dont offer such a low Minimum option (it is usually around 65-70%)

    My name is Jason Fry, I am a licensed Mortgage Originator for Providential Bancorp.. I would be happy to assist you further in determinig which loan program is best for you..

    I have helped multiple here on this site both purchase a home, and refinance an existing mortgage as well.. Feel free to look over my profile page.. All of my answers are open to the public for viewing…

    You can reach me at 312-264-6448 for more advice…

    Thanks, and good luck to you!

    Jason Fry
    Licensed Mortgage Consultant
    Providential Bancorp (serving most of the US)

  2. Reply
    April 29, 2011 at 9:49 pm

    Depends on how disciplined you are about making your payments and managing your debt.

    An option ARM allows you a choice of 4 mortgage payments each month.

    For instance, you can choose a payment based on a 1.5% interest rate, an Interest only payment, a 15 year payment or a 30 year payment. In most cases, your interest rate will adjust every month. But your initial minimum payment will stay the same for a specified amount of time.
    The 1.5% interest rate is a “teaser rate” for payment purposes only, not the actual interest rate being charged. In fact, you will be accruing interest that will not be paid in full by the lowest payment choice. It will be added to your balance and you will now have negative amortization. In other words, you may end up owing more on your mortgage than you originally borrowed.

    This is a great loan for people who have variable income but are disciplined enough to make lump sum payments when times are good. That way you can avoid negative amortization but still have the flexibility of choosing the payment that works for you each month.

    It’s also a great loan for people who expect a large salary increase in the near future.

    If you have any further questions, please contact me at

    Best of luck!


  3. Reply
    Real Georgian
    April 29, 2011 at 10:28 pm

    Should You Consider Home Refinance or Not
    By: Jay MonCliff

    This site contains information that can help you. Plus, there are companies you can research more with too!

    Goooooood Luck!

  4. Reply
    April 29, 2011 at 11:00 pm

    It can be a good idea “if” you can pay off all of the $ 10k before the 4.99APR teaser rate expires – understand that you will still have to make your regular $ 574 payment + $ 188 per month to pay off both loans (if the teaser rate is good for 5 years, more if the teaser rate is shorter than that), your first payment doesn’t go down, so if the $ 188 will squeak you, then bad idea.

    What you COULD do, is take out the $ 10k at 4.99, invest it in GMAC demand notes @ 6%, and then take the tax benefit off of the loan interest and pocket the difference – so you make an extra 1% off of your money, no loss, and if you wanted to, you could make that $ 188 payment off of the demand note each month!

  5. Reply
    April 29, 2011 at 11:30 pm

    You are right, it can and does work, if you know how to leverage the line of credit without falling into the adjustable rate trap.
    There is a educational site that teaches you just how to do that along with many other strategies and techiques to ‘unlend’ a loan.

  6. Reply
    April 30, 2011 at 12:08 am

    If you crunch the numbers, you won’t be saving yourself very much money, and it will be at the expense of your credit score.
    Since you will have to pay back both loans at the same time if you do this, why would you not just put that extra money every month towards your principal? That would save you more in the long run than taking out a home equity loan. In other words, don’t do it, rather pay extra every month to save money in the long run. It is not worth it to take out a loan to pay off a loan…it does not work, even if it sounds like a good idea.

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