The beauty of these types of loans it that there is a different start rate, i.e., rate at the beginning and different monthly payment options. That does not mean that you can shirk your responsibility of being smart. These mortgages are the esoteric beings of the financial world that you must make sure and understand.

They say that when you take a loan, the lender takes away an arm and a leg. Well, the ARM in this case is that Adjustable Rate Mortgage. You, the all important customer, now has the choice to decide the payments you would like to make on a monthly basis. This schedule of payment is then set out in black and white in your loan document. That is why such options are called Pay Option, Pick-a-Payment, Cash Flow ARM, or Option ARM loans?

Investigate further: The Option ARM loans have a starting introductory period which has the lowest interest rate. If you have good credit rating, and can put down a hefty down payment, the start rate will be lower. But do not get taken away by the low interest rate, sometimes as low as 1.25%, in the start. This start period will last only for one to three months. The "start rate" will be one of the drivers in deciding your payments for the first year.

In the good ol' 30 year mortgage, there is no "index" that you need to think about. But in the case of the Option ARM mortgage, your rate of interest rate is recomputed each month after the initial honeymoon "start" period. And the basis of this rate of interest is the index.

You can be sure that the eventual interest rate will never sink to the "low levels" of the initial starting period interest rate. The index that is used to determine your rate of interest is primarily based on the COSI, or Cost of Savings Index. COSI is not the only index used and there are many other indexes that can be deployed with ARM loans. So the key feature to keep in mind while opting for an ARM loan is the description of the index that will be used to compute your rate of interest.

Interest rates could be re-calculated monthly or annually or anything in-between.

Now we move the other important feature: the margin. The margin is like the profit that the lender makes over and above the index that is being used. For instance, the ARM mortgage may stipulate that there would be a 3% margin. That will mean that in addition to the inflation in the index, you will pay 3% more.

When you look closer you will find that the Option ARM loans often give borrower four payment options: Minimum Payment, Interest-Only Payment, Fully Amortized Payment, and 15-Year Payment.

The above description has just managed to tell you about the basics of the ARM loan. A smart buyer begins by comparing the credit options. Then she/he compares loan-providers. It is smart on your part to shop around and bargain. That is the way mortgages work.