Before we cover the features of this new loan offering, we should review traditionally popular loan programs:

* Fixed rate loans carry a set monthly payment and are based on a set interest rate that lasts for the life of the loan. Because the payments are constant and cannot increase, they are considered the safest of the available home loan programs. The most popular form of this loan is the thirty year fixed rate.

* Adjustable rate mortgages, often called ARMs, are typically set to repay over a 30 year period, but the interest rate can change from time to time, depending on the loan selected. This results in payments which adjust on a periodic basis.

* Hybrid ARMs are a combination of the first two programs, and feature a fixed rate for a designated number of years, followed by a conversion to a "one year ARM" for the remaining life of the loan.

This loan has proven popular with home buyers because they offer the safety of a slightly lowered fixed rate for an initial period of ownership, then please lenders by eventually tracking market rates during the adjustable period.

A popular form of this loan in recent years has been the so called "5/1" loan, in which payment and interest rate remain fixed for the first five years, then adjust annually thereafter.

The new type of home loan to enter the market recently is the "option ARM," and for many borrowers who may be tempted to choose it, I consider it nothing short of dangerous. Here are its features:

Sort of like an ARM, the interest rate and the payment amount needed to pay off the loan on time can and do change, but on this loan, the change is not annual, but monthly. As interest rates change, so do your payments.

In addition, with an option ARM, you have the option of selecting from a variety of payment options each and every month, based on your financial situation at that moment:

Option 1 is the "minimum payment," and this amount typically stays the same for a period of 12 months. This minimum payment is the smallest amount the lender will allow you to pay on that particular month. In cases where the interest rate has risen, the minimum payment will not even cover the interest being charged on the loan, causing the loan balance to actually increase for that month.

This process is called "negative amortization," and can result in the borrower owing more month after month, exactly the opposite circumstance the borrower is hoping to achieve. Of course, as the loan balance increases, the interest cost increases as well, because it is calculated on the new, larger principal balance.

Option 2 is called the "interest only" payment, and is based on the fully adjusted interest rate for that particular month. By making this payment, you avoid any negative amortization, but no portion of the payment is applied toward reduction of the principal loan balance.

Selecting either of these first two options indefinitely would result in the loan balance remaining constant or increasing forever, a condition that the lender would, of course, find unacceptable. So, in every fifth year, or sometimes sooner, the loan is recalculated, and the minimum payments are increased to cause the loan to pay off in a reasonable number of years.

Option 3 is the "fully amortized" payment, meaning that making this payment of principal and interest will result in the loan paying off in the remaining scheduled term of the original loan. This amount would be similar to the payment is a fixed rate loan, except that the interest amount can change, up or down, on a monthly basis, resulting in potentially frightening payment changes every month.

If anyone were to stick to this option, their loan would, indeed, pay off as originally scheduled. But this begs the question - if this were your original plan, why didn’t you select a fixed rate loan program in the first place?

Option 4 is similar to the previous option, but recalculates the loan for a fifteen year original amortization, and gives the borrower the option of making a fully amortized principal and interest payment which will cause the loan to be paid off in 15 years instead of the original 30 years.

In every case, this would be the highest payment amount of the four options, and I suspect it is the option least selected. Instead, this loan caters to the financially irresponsible by offering payments set routinely below even the interest which is being charged month after month.

Lenders advertise this loan as giving the borrower increased flexibility and more financial "options." Instead, I suggest that this type of loan allows borrowers to try to avoid the financial discipline inherent in home ownership.

My opinion is that this loan is perfect for those who are shopping for an economic disaster, and hope to dig themselves deeper into debt before they have to come to their financial senses. I suppose there are some wealthy and sophisticated borrowers for whom this type of loan makes sense, but I have never met one.

My advice, as boring as it may be, is to buy a home within your budget, and stick to a more traditional form of home loan.