Mortgage Loan Originator (MLO) Licensing Practice Test 2025 - Free MLO Practice Questions and Study Guide

Option ARMs, or Adjustable Rate Mortgages, are distinctive for their flexible payment options, which allow borrowers to choose from different payment plans each month. This flexibility includes a variety of choices such as a minimum payment that may be less than the interest that accrues, leading to a potential negative amortization scenario where the balance owed can actually increase. Borrowers can also opt for fully amortizing payments, interest-only payments, or a combination, depending on how they wish to manage their monthly budget and housing costs. This versatility is one of the main features that attract borrowers to Option ARMs, especially those who may have fluctuating incomes or prefer to control their monthly housing expenses closely.

Fixed monthly payments are not a characteristic of Option ARMs because their payment structure changes based on the interest rates and the borrower's selections. High interest rates can be a concern but are not a defining feature; instead, they can vary widely based on the loan conditions and market rates. Interest-only payments are one of the flexible options, but they are not the only choice available, further highlighting the flexibility of the mortgage.