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Definitions of Pay Option ARM

This loan product has been around for a substantial period of time but has recently skyrocketed in popularity and infamy. Index, start rate, margin, and time are key components to this product. Index is the selected market used to determine the base interest rate (Treasury, MTA, LIBOR, etc). Start rate is the initial interest rate charged against the loan. It is a percentage amount well below the actual interest rate. Margin is the amount charged above the index. Index + Margin = Overall interest rate The borrower has four options to chose from for each monthly payment. 1. Start rate payment. This is the cheapest payment that can be made. Start rates are often as low as 2%. Making this monthly payment will result in negative amortization. 2. Interest only payment. This payment only services the accrued interest on the loan. 3. 30yr payment. 4. 15yr payment. See "ARM" for more details. This definition of Pay Option ARM contributed by e2cpilot.