Minimum Option Payment

Definition: The minimum payment required on an Option ARM mortgage. It is figured on the start rate of the mortgage. The start rate is less than the market rate of interest by a few points. Miniumum option payments do not include interest on the loan since the indexed interest rate is much higher. By making a minimum payment, a borrower is increasing the original principal balance. Minimum payments can be a wise choice as long as market conditions favor such payments. To protect equity, if appreciation slows or prices fall, borrowers will need to make higher payments at some point to cover the interest that is left unpaid.