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Date Recommended: October 18, 2006

Are Interest Only ARM Loans For You?

Interest-Only Mortgage Payments and Payment-Option ARMs – Are They for You? is a a new resource that can help consumers make more informed choices when considering nontraditional mortgage loans.

Many lenders offer home loans that allow consumers to (1) pay only the interest on the loan during the first few years of the loan term; or (2) make only a specified minimum payment that could be less than the monthly interest on the loan,

Lenders have a variety of names for these loans, but with I-O (interest-only) mortgages and payment-option ARMs (an adjustable rate mortgage (ARM) with the option to make a minimum payment), consumers could face “payment shock.” Monthly payments may double or even triple following the interest-only period or when the payments adjust. Consumers with payment-option ARMs also could face negative amortization, a situation in which the monthly payments do not cover all of the interest owed for that month. The unpaid interest is added to the mortgage balance so that the amount owed on the mortgage exceeds the amount originally borrowed.

Interest-Only Mortgage Payments and Payment-Option ARMs – Are They for You? features a glossary of lending terms, a mortgage shopping worksheet, and a list of additional information sources. The fact sheet has been issued to help consumers who are buying a house or refinancing a mortgage decide if these new mortgage loans are right for them.

The publication stresses key mortgage loan terms, warns of the risks consumers may face and urges borrowers to be realistic about whether they can handle future payment increases.  If consumers are not comfortable with these risks, the publication suggests that they ask about other mortgage products.

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