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Mortgage
Products: The Adjustable Rate Mortgage
You've
found the home of your dreams. You're pre-qualified for a loan, and
everything looks absolutely rosy. At first. As you begin to traverse
the actual home appraisal, the loan amortization, your down payment,
and all the dots that must be connected in order to make the dream a
reality, you suddenly realize that you may not be able to afford a
payment on the Fixed Rate Mortgage plan. What other options are
available? Well, there's the Adjustable Rate Mortgage that is a close
first cousin to the Fixed Rate mortgage, just a little riskier. What
advantages does the Adjustable Rate Mortgage option offer, and what are
they drawbacks, if any? This article examines the advantages and
disadvantages, if any, of the Adjustable Rate Mortgage.
The
Adjustable Rate Mortgage, or ARM , is a more affordable option for
homeowners who have a fairly tight monthly budget, and who have a need
for bigger house, lower payment. The typical ARM customer wishes to
build equity in their home; however they need the lowest monthly
payment possible, for a certain number of years. The homeowner this
program most benefits is the individual who expects income increases to
occur within a few short years, but also has an expanding family with a
need for space.
An
ARM works in this way: when you set up your mortgage on an ARM , the
interest rate you have will only be set for a very short period of
time, normally only 6,9, or 12 months. At the end of that period, the
interest rate will be re-evaluated, and if the rates have increased
based on the prime, your interest rate will also increase; once again,
for a short, set period of time. The benefit derived from this type of
loan, during today's economy, is that the interest rates are at an all
time low. That equates to big savings for current home buyers, and
homeowners who refinance.
The
disadvantage to this type of loan occurs when interest rates begin to
rise. As the rate rises for the lending institution, it also rises for
you, the homeowner. Today, there are spin-offs on the ARM base product,
that allow homeowners to operate under an ARM for a specified number of
years, and then the loan converts to a fixed rate mortgage. There are
also the ARMs that offer an interest only option for a specific number
of years, then it converts to a basic ARM for a specified number of
years, and then you have the option to convert the ARM to an FRM. The
home mortgage product market can be very confusing, and quite
frustrating if you don't take the time to fully research and understand
your mortgage options.
Another
great benefit to the ARM , when interest rates are low, is that it
allows you to build equity faster than with a standard fixed rate
mortgage. But if interest rates begin to rise, quickly, your
opportunity for building equity quickly, is greatly diminished, because
more of the payment is directed to the interest on the loan. If you
fall into the category of the typical homeowner, ARMs aren't as
attractive as the fixed rate mortgage; but let's face it the typical
homeowner category seems to be shrinking.
There
are so many options with the ARM basic model, that the ARM option loans
have become more popular than just the basic ARM . The 3,5,7 and 10
year ARMs that offer interest only options for a set period of time, or
that offer 1% interest for the first month, then there are the ARMs
that offer interest only for 3,5,7, or 10 years, then a standard ARM is
established, or a FRM is established.
The
mortgage industry has made available so many mortgage choices, that
it's often very difficult for the average consumer to consider all the
options and make the most wise choice, simply because you need a
spreadsheet and calculator just to compare the options, never mind
making a decision about the best options.
All
in all, if you are buying a home, and your income level is expected to
increase over the next 10 years, or your expenses are going to
drastically decrease, you would probably benefit from the standard ARM
that converts to a FRM. All the other complicated options still simply
do not benefit the average homeowner today. Now, if you don't happen to
be average, and you have a financial advisor that can work with you
closely, I'd recommend that you consider all those other options, but
only with the assistance of a trained financial analyst. After all,
your home is a purchase you definitely do not want put at risk. Be sure you read all our pages...
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