Option Mortgage

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This is a type of mortgage that was developed only recently. Although similar to an adjustable rate mortgage, it is much riskier for the borrower. As the name implies, these mortgages give the buyer various repayment choices each month. Buyers can make payments that include a partial repayment of the principal, they can make interest-only payments in which no principal is repaid, or they can make payments that do not even fully cover the interest due, so that any interest not covered is added to the original loan amount ( negative amortization). In a rapidly appreciating housing market, an option mortgage may work, but if house prices drop, the buyer could be faced with owing the lender more money than the buyer could make from a sale ( negative equity). Also, the buyer could face a big jump in monthly payments if interest rates start to rise. See also Balloon Mortgage and Fixed Rate Mortgage.