Refinance with an Option ARM

Most adjustable-rate mortgage loans are armed with a significantly discounted introductory rate, which can last from several weeks to several years. After the initial period expires, the rate adjusts. If rates have risen, so will your monthly mortgage payments. Many homeowners hope to sell their homes and pay off the loan before the rate adjusts. By so doing, they can take advantage of the introductory rates without having to pay the higher adjusted rate. But others who plan to hold their loans for longer periods of time can choose the "Option Arm," which offers extreme flexibility and has characteristics of an interest-only loan built into it.

New mortgage refinancing choices

The Option Arm usually provides the borrower with the choice of three different ways to make monthly payments. You can pick and choose which one to use depending upon your preference each time the monthly payment comes due. Simply check a box on your payment coupon to indicate which option you've selected, and enclose a check for the appropriate corresponding amount.

Here are some choices available to you:

1. You can elect to pay interest plus a portion of the principal. This is how mortgage payments are normally calculated and repaid.
2. You can pay interest only. This will reduce your payment, but it won't pay off any of the actual loan.
3. You can opt to pay only a minimum payment, which may not cover the interest due. In that case, you would defer payment on the rest of the interest and principal until a later date.

The home mortgage for fluctuating incomes

These loans are especially helpful if you have a fluctuating household budget. For example, if you're a teacher who gets a paycheck only nine months out of the year because schools are closed in the summer, you can reduce your monthly payments during the lean months. Or, if you need to make a major purchase, you can minimize your mortgage payments for a time in order to save up the extra cash.

Most Option ARMs let you pick your own payment plan until the amount you owe on the loan exceeds 110 percent of the original loan amount. (A loan would top-out at more than the original amount if you continually pay only the minimum amount due. At some point, the payments you defer will be tacked onto the balance owed. It will eventually rise above 110 percent of the amount you first borrowed.)

If it's time for a mortgage refinance, consider the Option ARM. There's a good chance it will give you the flexibility you need and help you save an arm and a leg.