Secure Option ARM

A secure option ARM is a payment-option adjustable rate mortgage that includes a fixed interest rate and allows borrowers a flexible monthly payment plan, one that can see the minimum payment amount result in negative loan amortization. Secure option ARMs offer more protection from payment shock than a true payment option arm, but the monthly payment on a secure option arm still has the potential to increase substantially. This can occur if the negative amortization limit is reached or when the fixed-interest-rate period ends, which usually coincides with the first scheduled recast of the mortgage.

The mechanics of a secure option ARM are similar to a payment option arm; the difference is that it has a fixed interest rate similar to a fixed period or hybrid ARM. A payment option allows the borrower to choose among several monthly payment options; for example, a 30 or 40-year fully amortizing payment, a 15-year fully amortizing payment, an interest-only payment, a minimum payment or a payment of any amount greater than the minimum. For the minimum payment option, the calculation is based on an initial temporary start interest rate. 

Secure option ARMs have the same monthly payment options as their payment option ARM counterparts, including a minimum payment option that is based on a temporary interest rate that lasts for one to three months. However, after the temporary start interest rate expires, the secure option ARM has a fixed interest rate period similar to a fixed period or hybrid ARM.

Payment option adjustable rate mortgages, which came to the market in the 1980s, became popular among those mortgage purchasers with irregular income streams. These negative amortization mortgage options, for instance when an increase in the principal balance of a loan caused by a failure to make payments that cover the interest due, allowed a certain segment of the housing market to become homeowners.

However, history shows that these payment plans can lead to borrowers and lenders combining to make poor risk-based decisions that can cause both of them financial distress. The idea behind these products is not negative or without cause; however, when they are used incorrectly or borrowers do not fully understand the implications of negative equity and the risk that they assume, there is potential for a negative outcome. Any borrower considering an adjustable rate mortgage should make sure that they know exactly what they are responsible for and the risk that they assume.