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Tax considerations of an Option Arm

The tax implications of an Option Arm are something to consider. The deferred interest aspect of the loan can give you an opportunity to manage your real estate tax deduction in addition to your monthly payment.

Lets assume you are using the minimum payment option and are deferring interest at the rate of $250 per month. That will mean that you are reducing the annual amount of your interest deduction by an equal amount. Actually lowering the amount of your interest  deduction in a year in which net income is lower than normal can keep you from going into the Alternative Minimum Tax situation minimizing your overall tax burden. You have the ability at any time you wish to pay down the balance with any additional payment reducing the deferred interest first. An excellent example of this would be an individual whose income is cyclical. In years where income is off, let the deferred interest accumulate and in years where income is up and you anticipate an additional tax burden, you will want to pay down the deferred interest to maximize your interest deduction. A good way to think of this is that you have an account that you can add to or subtract from at any time to immediately impact your tax burden.

Another way to use this feature of the Option Arm will be in a situation where you will not be able to take full advantage of the One Time Capital Gains tax due on the sale of your property. Consider using the minimum payment feature to build up the deferred interest balance. When the property is sold or refinanced, the payoff allows you to capture the deferred interest amount at that time allowing you to counter balance any Capital Gains tax due. The Option Arm really can give you the ability to manage your taxes as well as your mortgage payment.

Please remember that I am not a tax attorney and that you should seek the advice of an attorney or financial planner. These are my experiences and observations based on a great deal of experience with an Option ARM.


As a Certified Mortgage Planning Specialist, I offer an analysis of your situation today can make suggestions on how small changes in how your consumer and mortgage debt is structured today can have a life changing effect in the years to come.  Read more about this free, no obligation service.


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