1 MONTH ADJUSTABLE RATE MORTGAGE

Also known as the "Many Options ARM" or "Pay Option ARM." The payment rate and the interest rate work independently of each other which allows for greater flexibility in payment options. The payment you are required to make changes annually. The actual interest rate can change monthly.

There is normally a vast difference between the payment rate and the actual interest rate that is charged on the loan. With this type of loan you have 4 payment options every month. These options are:

1.	Minimum Payment Option The payment is fixed for the first 12 months and is initially based upon the "start rate" or payment rate (Note: the minimum payment is not the interest rate on the loan). The minimum payment usually stays the same for 12 months at a time unless your loan re-casts. While the minimum payment isn't changing, the interest rate may still change every month. This means that you will be paying less than the interest charged for the loan when you pay the minimum payment. The difference between the minimum payment and the interest only payment is added to your loan balance. This increase is called negative amortization.
2.	Interest Only Payment This is paying only the interest charged on the loan for the previous month. With the interest only payment option you will avoid negative amortization. No portion of the payment will be applied to the principal balance of your loan. The interest only payment may change from month to month with the changes in the index value (which is used to determine the interest rate) and the principal amount of the loan. If you select the interest only option your loan balance will remain the same. It will not go up or down.
3.	Full Principal and Interest Payment - 30 year term You pay all the of the interest charged on the loan for the previous month as well as enough principal to pay off the loan in 30 years. The payment may change from month to month with changes in the index value which is used to determine the interest rate.
4.	Full Principal and Interest Payment - 15 year Term You can accelerate the loan by making larger payments and eventually shortening the term of the loan. This amount will include all the interest charged for the previous month and enough principal to pay the loan off in 15 years. The payment may change from month to month with changes in the index value which is used to determine the interest rate.

Payment Rate
Initial payment rate remains the same for the 1st year (i.e. 1.25%). This is what is referred to as your 'Minimum Payment'. Every year on the anniversary of the 1st payment, the minimum payment may change. The payment may increase by 7.5% of what the current monthly payment is.

Example: Loan amount $300,000

Year 1= $999.76
Year 2= $1074.74
Year 3= $1155.35
Year 4= $1242.00
Year 5= $1335.15

Every 5 years, the loan is recast or re-calculated by taking the current principal balance (including any accrued and unpaid interest if applicable) and amortizing it over the remaining years of the loan.

If at any point in time, the loan balance reaches 110% (some are 115%) of the original loan amount, the loan will automatically be recalculated at the full interest rate and amortized over the remaining term of the loan. At these times, the payment cap of 7.5% is not in effect.

Interest Rate
The interest rate equals the margin plus the index and can change monthly. Every time the index changes, the interest rate changes.

Example: Loan amount $300,000

Index = 5.12%
Margin= 2.40%
Monthly interest rate = 7.52%
Interest only payment = $1880.00

This is the rate at which interest is accruing on your loan. Notice that the rate for the interest only payment is higher than the minimum payment rate. This means that any difference between the minimum payment amount and the interest only payment is deferred. Interest that is deferred will be added to the principal balance that you owe. This increase in your loan balance is called "negative amortization". Interest will be charged at the current interest rate on the total outstanding principal balance every month.

Example
Let's just assume that the index stays the same for the first year of your loan, so the interest rate does not change. Using the loan amount, interest rate, and payment rate above, here is how the negative amortization works.

Interest only payment: $1880.00
Minimum payment: $ 999.76
Difference: $ 880.24 this is your negative amortization amount.

The negative amortization amount is added to your loan balance every month. This means that after the first year your loan balance will be $10,562.88 higher than where you began.

Lifetime Interest Rate Cap
The interest rate may never exceed the life cap. Life caps may vary from loan to loan.

Basically what it comes down to is that you are trading equity for a lower payment. It is "pay now or pay later". There are no 1% or 2% loans that don't have some sort of repercussions. If you have a lot of equity and want a low payment, and don't care how much you owe on your home in a couple years, then this may be the right loan for you.