Minimum Payment Option Basics
A minimum payment option loan allows a borrower to make a minimum payment on their mortgage. This amount is often below the interest only level.
A 1% minimum payment option loan allows a borrower to make a minimum payment at the 1% rate. Your minimum payment is calculated using 1%, but your interest rate is a different number.
A minimum payment made usually results in negative amortization. This is when your loan size increases. This happens whenever you make a mortgage payment that is less than interest only.
The interest rate on this loan is very different than the minimum payment rate.
The interest rate is usually the combination of an interest rate index and a margin.
The interest rate index is an index that tracks interest rate levels. There are many different interest rate indexes, including the LIBOR index, the CODI index, and the CODI index.
These interest indexes are usually independent third party indexes that a lender can base their loan on. In this way the lender is not dictating directly the changes to your interest rate.
The margin for a loan is the lenderís profit. This is added on top of the interest rate index to determine your interest rate.
Is The Interest Rate Fixed?
Minimum payment option loans often have interest rates that are adjustable.
They usually come with a lifetime interest rate cap to keep the interest rate from increasing too much.
Interest rates on some minimum payment option loans can be fixed.
Recently lenders have introduced loans where the interest rate is fixed for 5 years, the interest only payment is fixed for 5 years, and the minimum payment is also fixed for 5 years.
Check with your lender or broker to see what the interest rate is on your minimum payment option loan, and how it will change if it does.