From Businessweek
Option ARMs give you an option of how much to pay each month on a mortgage. There are generally several options or choices. However, once you owe a certain amount (like 110-125% of the original loan amount) then the interest rate rises sharply and no further options are allowed.
The blue bars show when ARMs would reset to higher rates five years after the origination date. The gray bars show the expected reset rate, which is much earlier. This indicates that strapped homeowners are making the smallest possible payment each month. Thus, the amount owed rises faster and the rest happens sooner.
Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners.
Yikes.