john the mortgage man logo
John The Mortgage Man

Option Arm Basics: What You Should Know

An option arm is an adjustable rate mortgage with the added flexibility of being able to choose from a variety of payment options from month to month. Option Arm’s go by many different names including ‘cash flow option loan’, ‘pick a payment loan’, ‘1-month MTA’, and so forth. The increased flexibility of these programs can help an individual better manage their cash flow. However, there are certain pitfalls that any borrower considering an option arm should be aware of. Don’t just get lured in by the promise of a low introductory rate. The best way to know if an option arm is the right program for you is to start with the basics.

What are the Options?
Typically, the borrower can choose from 4 different payment options each representing a different loan program. The borrower will have 2 fully amortized payment choices representing a 30-year and a 15-year loan. These will be the highest monthly payment options and the fastest way for the borrower to build up equity. Making additional payments to the principal will build equity even faster. This will further reduce the amount needed to be paid back over the following years.

The 3rd major payment option will represent an interest-only program. The interest rate will change from month to month based on changes in the ARM index. The borrower will basically be paying just the monthly interest expense without putting any money towards the principal of the loan. This option will be available as long as the interest-only payment is higher than the minimum payment option.

The minimum payment option is always going to be just that, the choice that requires the borrower to pay the least amount of money towards the loan. The minimum payment interest rate will be set for a specified time period (usually 1yr). The payment changes annually after that based on limits placed on how much the interest rate can increase or decrease from year to year. After the initial interest rate period, the minimum payment option may not be enough to cover the monthly interest expense that is being incurred. This will lead to ‘deferred interest’ or ‘negative amortization’ and is where the borrower can get into trouble.

Who should use an Option ARM?
Option ARM’s are generally used by borrowers who are not planning to own the property for a long period of time and prefer the flexibility of the monthly payment. Most lenders will recommend that the borrower only goes as low as the interest-only payment option. This ensures that the borrower will never be surprised by the deferred interest that is created when choosing the minimum option. Other individuals use these types of loan programs to buy more house than they could otherwise afford. For this reason, Option Arm’s are growing in popularity in areas where there is a high cost for housing. The East and West coasts especially. When a borrower uses an Option Arm to buy more house than they can afford they leave themselves at the mercy of interest rates. Rates rise and so do the borrower’s monthly payments. If the borrower can only make the minimum payment the unpaid interest gets deferred and added to the principal. This is know as ‘negative amortization’ and can cause the borrower to end up owing more than he or she borrowed at the end of the loan term. This can come as quite a surprise to a borrower who enters into an Option ARM and is not aware of the pitfalls. That is why the interest only payment option should be the lowest payment the borrower should make unless absolutely necessary. The borrower will not have to worry about negative amortization as long as they pay at least the interest-only option amount or more.

If you enter into an Option ARM you must be able to maintain a high degree of financial discipline. You should also do your research and familiarize yourself with the ins and outs of Option ARM’s above and beyond what is included in this article. Your local mortgage broker, Company Name, is a good place to start. An experienced loan officer will be able to provide you more in-depth information based on your credit score. Be sure to ask questions and compare other loan programs to your financing needs. Option Arm’s offer a high degree of financial flexibility but also bring with them a high degree of risk if used recklessly. The more you know about the ins and outs of Option ARM’s the better position you will be in to make a wise decision.

The minimum payment option is always going to be just that, the choice that requires the borrower to pay the least amount of money towards the loan. The minimum payment interest rate will be set for a specified time period (usually 1yr). The payment changes annually after that based on limits placed on how much the interest rate can increase or decrease from year to year. After the initial interest rate period, the minimum payment option may not be enough to cover the monthly interest expense that is being incurred. This will lead to “deferred interest” or “negative amortization” and is where the borrower can get into trouble.

Recent Posts

Meet them man…the mortgage man.

mortgage man video

Debi CampbellDebi Campbell
17:05 13 Feb 22
John McCoy and his staff are just outstanding! Their efficiency and ability to respond quickly to any of my questions and needs is what made the... difference in me getting my house so quickly. It only took 3 weeks because of their ability to expedite m paper work quickly to those that needed it, along with my clean credit! Thank you so much for all your hard work! Each one of you!read more
Bobbie-Jo TorresBobbie-Jo Torres
19:49 07 Feb 22
Very quick and helpful. They made everything smooth and easy and in terms that I could understand! Highly recommend!!
daniel villarrealdaniel villarreal
04:19 03 Oct 21
John The Mortgage Man went that extra mile to make sure I received the best mortgage on our new home. Very satisfied. Thank You John.
Danny OchoaDanny Ochoa
17:39 16 Jan 21
John was the one who took a chance on me and my wife . Thank you so much for changing our lives and putting us in our new home . If anyone out there... needs someone to help them make there dreams come true reach out to John and the professionals mbn me they won’t let you downread more
Herb FarleyHerb Farley
23:05 06 Jan 21
What an amazing experience! John and his team were extremely responsive and easy to work with! They made the loan process easy and never hesitated... to answer our questions. I would recommend John the Mortgage Man to anyone looking for a loan!read more
Mason ShirleyMason Shirley
18:19 04 Jan 21
Working with John McCoy was very easy and convenient. He walked us through the entire loan process with excellent communication and knowledge. We... were in a time crunch to purchase a home before the end of the year, and John worked fast to make it happen. Would highly recommend!read more
Debbie PowellDebbie Powell
05:38 21 Dec 20
John has helped me purchase 2 houses! John is easy to talk to and makes you feel like family. He is the best person you could have to help you in... this process! John will make it happen! Thank goodness he came highly recommended to me. John is truly a hero!read more
Vivian SimsVivian Sims
19:38 20 Dec 20
John McCoy has been our "mortgage man" on two purchases. Both went smoothly without a complication. The money and timeline were exactly what he... represented. I have recommended him to many looking for a mortgage. If you are looking for An honest, smooth mortgage progress, call "Jo John, the Mortgage Man". Way to go "Mortgage Man"!read more
Amando CanalesAmando Canales
20:21 18 Dec 20
John The Mortgage was a most professional experience my wife and I had a pleasant experience and were most satisfied with his service his can do... attitude was greatly more
Mark FosterMark Foster
11:17 30 May 19
John and his team worked diligently to make the process as easy as possible. They kept me informed and sent me step by step what they were doing so I... always knew where we were in the process. I had a very low credit score and they still made it happen! Thanks John, Troy, Allan and the whole more
Rich and Bekah RobertsRich and Bekah Roberts
17:43 24 May 19
John and his team are excellent at what they do. Very friendly and helpful, yet also down to earth and realistic about your ability to attain such... and such mortgage. John will let you know if your "dreams" are a match with the reality of your financial situation. John wants you in a mortgage, but he wants you in one you can afford comfortably. I had numerous questions throughout process, and John gladly answered each and every one. I am very grateful my wife and I chose John, and would do so again if/when we have other mortgage needs. If you're ready to buy a home, you wont be disappointed with John McCoy!read more
Jeremy DeanJeremy Dean
06:16 07 Mar 19
John the Mortgage Man worked to get me and my wife into our first home this year! We had some issues with low funds, high debt and bad credit, but... John helped us to determine how much we needed to save up to get in the home we wanted. Once we got there John was able to hook us up with a lender and get us a good deal on a loan. We closed in just over two weeks from the time we found a house that we wanted! John always made us feel at ease and answered any questions we had. Very knowledgeable, very responsive and very kind! Thank you John for everything! Highly recommend!!!read more
John McCoyJohn McCoy
15:12 19 Feb 19
John made getting our loan processed very efficient and worry free. He will do the same for you!
19:47 20 Oct 18
12 days from application to closing, now that's fast! Great overall service, everything John said he would do, he did it. My clients were thrilled.
Frank J RosatiFrank J Rosati
19:15 20 Oct 18
John made everything easy for the purchase. He had everything covered (all the associated costs, paperwork) that I needed to close. It was a pleasure... to work with him again (this is my second time working with John) and I would highly recommend him to anyone looking to finance a more
debbie powelldebbie powell
19:05 19 Aug 18
John goes out of the way for you to make sure you are informed, kept up to date, and always professional. Definitely goes the extra mile to help!... Everything is done in a timely manner. Thanks so much John! This is my second mortgage through John McCoy and more
Shawn LockettShawn Lockett
21:22 23 Mar 18
This guy is a wiz!!! He knows a ton about this business and how to get things done!!! Be up front, honest, and ask him your concerns and he will be... straight with you in return and get you in the house of your dreams... He was able to take us start to finish in three weeks time!!! Awesome awesome experience!!! P.S. He will only call you with news—it’s how you interpret it is up to you... Give John a call, you won’t regret it!read more
Laura PatrickLaura Patrick
16:29 30 Apr 16
My husband and I recently bought a house in the area. It was my first time buying a house, so I don't have a lot to compare to, but my husband kept... saying how much nicer it was working with John than his last experience. My husband did most of the loan-stuff, but I got to experience John's wonderful presence at our closing. I was expecting the closing to be stressful, but it ended up being a pleasant experience partly because of John's presence. He explained things in easy-to-understand terms and brought a very positive energy to the room. He was great to work with and we've already been recommending him to our friends who are looking to buy more

John McCoy NMLS #308360
NEXA Mortgage, LLC NMLS# 1660690
AZMB 0944059

John The Mortgage Man
NEXA Mortgage, LLC
3100 W. Ray Road, Suite 201, Office 209
Chandler, AZ 85226