What typically results from choosing an Option ARM?

Choosing an Option ARM (Adjustable Rate Mortgage) typically leads to negative amortization, which occurs when the payments made are less than the interest accruing on the loan. As a result, the outstanding balance of the mortgage increases over time rather than decreasing. This situation arises because Option ARMs allow borrowers to select from various payment options each month, and one of those options often includes a minimum payment that may not cover the total interest costs, leading to an increase in the loan balance.

The flexibility of choosing between payment options can be appealing, but it can also lead to consequences like negative amortization, where the borrower may find themselves owing more than their original loan amount as the loan matures. Therefore, understanding the implications of selecting an Option ARM is crucial for borrowers to avoid potential financial pitfalls.