How Do I Manage Cash Flow With A Cash Flow Payment Option Loan?
Basics
A cash flow payment option loan is a mortgage that allows you to pick your payment each month. This option to choose your monthly payment is usually offered for three to 5 years, although this changes from lender to lender.
Your monthly payment options are generally:
- 15 year loan payment
- 30 year loan payment
- interest only payment
- minimum payment
Interest Rate
The interest rate on this loan type is usually based on:
- interest rate index
- margin
The marign is usually fixed, and is the markup on top of the interest rate index that represents the lender's profit.
The interest rate can change based on changes in the interest rate index.
Often times the interest rate indexes are weighted averages of the past 12 months of interest rates. This helps interest rate changes move more slowly through the index.
Minimum Payment
The minimum payment is usually fixed for each year of the time the borrower is allowed to make a minimum payment. Each year the minimum payment may increase slightly. For example, in the first year a minimum payment may be $1,000 and the next year this may increase to $1,075.
Whenever you make a minimum payment you may have negative amortization happen. This is when your loan size increases. The difference between any minimum payment made and the interest only payment is added onto your loan. For example, if a minimum payment is $500 and the interest only payment is $1,000 then $500 will be added onto your loan if you make only the $500 minimum payment.
For many borrowers this may be acceptable. They would rather have the cash instead of giving it to the bank.
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