Minimum Payment Option Loan
A minimum payment option loan offers the borrower an opportunity to make a minimum payment each month.
This minimum payment is usually less than other payment types, such as a regular monthly payment or an interest only monthly payment.
This type of loan can cause negative amortization. Any payment made below the interest only level is added on to the loan balance. For example, a mortgage with an interest only payment of $1,200 and a minimum payment of $800 will have $400 in negative amortization if the borrower only makes the $800 minimum payment.
Each month in a payment option loan the borrower has a choice of what size payment to make. The options are usually a minimum payment, an interest only payment, a payment as a regular 30 year loan, or a payment as a 15 year loan. The borrower has the choice in deciding which level of payment to make.
Increases In Payment Size
Minimum payment option loans usually offer the minimum payment option for only a few years. This is usually the first 5 years of a loan, after which the loan amortizes regularly over the remainder of the loan term.
Each year the minimum payment may be fixed. At the end of each year the minimum payment may be reset slightly upwards, but will again remain at the same new level all year long.
The payment increase is usually 7.5%. This is not an increase in the interest rate, but an increase in the minimum payment size.
For example, if the minimum payment is $1,000 in the first year in the second year the minimum payment will be increased to $1,075.
The minimum payment size continues to increase over time.
Check with a specific lender about how their minimum payment option loan works.