Carrie Reeder asked:




In a regular mortgage, the borrower pays a specific amount each month in order to pay the mortgage off in full by the end of the mortgage term. This is called a fully-amortized mortgage. Option one mortgage loans differ from regular mortgages in many ways. This article will explain how option one mortgages work:

Payment Options

Option one mortgage loans have three different payment options: fully-amortized payment, interest-only payment, and minimum payment. The fully-amortized payment is the same payment you would make on a traditional mortgage. An interest-only payment covers just the interest you’ve accrued that month and none of the principal. A minimum payment covers the principal amount for that month and a portion of interest based on a rate established by the lender. This rate is usually between one and two percent.

Conversion to Adjustable Rate Mortgage

After a certain period of time — usually five years — the payment options end and the mortgage converts to an adjustable rate mortgage. This means that the borrower would then be responsible for fully-amortized payments through the remainder of the life of the loan.

Benefits and Disadvantages

Option one mortgage loans are beneficial for people whose income is temporarily fluctuating. It may be a good mortgage for a college student who will be able to afford fully-amortized payments after they graduate and gain employment. However, it is not a good mortgage for people looking to earn equity in their home. Borrowers should understand that any unpaid portion of interest not covered by their monthly payment is added to the principal amount of the loan and charged interest. Five years of minimum payments could cause your principal to jump, causing the fully-amortized monthly payments to be considerably higher than they would be had you paid the fully-amortized payment from the beginning of the mortgage.

Nicole

Joey T asked:


I’ve recently purchased my parents home in order to free up income for them so they can live a better lifestyle and have more “throw” away income later in their life.

My situation is this: I refi’d their home instead of getting a traditional mortgage with a rate of 6.35ish in Sept. I am set up on a 20yr bi-weekly payment which should pay off in 17 years without putting any additional monies onto each payment (thank you to one of my friends for giving me that information about the bi-weekly payments. Saving 3 years right off the bat was very awesome…).

With the rates going so low lately should I consider refinancing in order to lower payments and/or timeframe of the loan?

RAY