Option Arm Mortgages
Option Arm Mortgages or Adjustable Rate Mortgages (ARM) is a mortgage plan that has interest rate which changes periodically, 
giving flexibility in making monthly payments. They have a term or period, usually about 3 years to 10 years during which the rate of interest remains fixed. From then on a variable rate structure is applicable which is ruled by the financial market rates. In general, these mortgages offer lower interest rates as compared to the fixed rate mortgages. Every five years they are recomputed and have a variety of rate adjustments depending on the financial market.
There are three main types of Adjustable rate mortgages that are available in the market. They are basically interest only, hybrid and the last being payment option Arms.
Interest-Only ARMs
Instead of making payments for the principal and the interest, the Interest only ARM requires the borrowers to make payments only for the interest. This will no way have affect on the principal amount. The only advantage of this is that you can pay smaller amounts for the duration of the interest-only period.
Hybrid ARMs
This is a fully amortizing option of the interest only arm. Instead of making the payments only for interest in the first few years, a hybrid ARM ensures the payment for both interest as well as principal from the first payment.
Payment Option ARMs
This gives an option to borrower to choose from a variety of payment plans available each month. This ideally suits for those who do not have a steady income or are in terribly tough financial situations. The monthly payments are low as compared to anything else. But over a period of time, in the long term this option can be disastrous.
The different payment options the borrower has are listed below:
First is the Principal and Interest Payment each month. The payments depend on the amortization schedule one chooses. The higher the amount one can afford to pay the quicker they can close it off.
Second is the Interest only payment where one is paying only for borrowing the money. There are no hidden costs involved here.
Third is the Minimum Loan payment. The payment is lower than the actual interest-only payment which is otherwise referred to as negative amortization. The future monthly payments are calculated in a very tricky way. The difference of minimum payment and the interest only payment is added to the outstanding loan balance. The inclusion of the difference amount will increase the future monthly payments and the total amount you owe the bank.
Payment option ARMs lure borrowers by offering what they call it as lower interest rates. Initially it may really appear to be lower interest rates for couple of months, and then they are as similar as any other mortgage. Banks convince you that they are offering lower interests but what they actually are doing is they are instead adding the difference of minimum payment and the interest only payment back to your loan amount. These loans are very risky and are best to be avoided.