Option ARM

Definition: Option ARM is an adjustable rate mortgage that provides flexiblity in making monthly payments. Its rate adjusts monthly, based on an index added to a margin rate. Payments can be less than interest, interest only or principal and interest, at borrower's option. Less than interest payments will result in negative amortization or increasing the loan balance. Option ARMS are recomputed every five years and contain a variety of rate adjustments that depend on whether indexes move up or down. It is a good choice for certain borrowers who need that flexibility and can choose wisely among the options presented.