What Is An Option One Mortgage Loan?
Option one mortgage loans are mortgages that have a term of a certain number of years in which there are three payment options. The term of payment options differs from lender to lender.
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The first payment option is a full-amortization payment. This is the amount of money that is required each month in order to pay the mortgage off by the end of the term. Full-amortization payments pay the interest accrued on the loan each month and a portion of the principal. A full amortization payment on an option one mortgage loan is the most expensive payment option.
The second payment option is an interest-only payment. This option only requires you to pay the interest accrued that month. Option one mortgage loans have variable APR’s, so this amount may differ depending on your current interest rate.
The third payment option is called a minimum payment. This is the lowest amount you would be required to pay in any given month. The minimum payment option covers a portion of your monthly principal and a portion of your interest rate. The amount of interest you are required to pay on a minimum payment is lower than your actual APR – usually between 1 and 2%.
Option one mortgage loans can be very beneficial to a person who plans to make more money by the end of the term of optional payments. This type of mortgage could allow them to own a home when they wouldn’t otherwise be able to afford it, and keep their home after they make enough to afford the fully-amortized payments of a traditional mortgage.
However, option one mortgage loans are not for everyone. For people simply looking to own a home and earn equity on it, an option one mortgage loan would not be a wise mortgage to enter into. When a borrower pays only the minimum monthly payment, the additional interest that they are not paying is added to their principal balance. They are then required to pay interest on their interest.
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