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Mortgage Products: The 20 Year ARM

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 products are available with the Adjustable Rate Mortgage? 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 and the 20 Year ARM option.

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. The 20 Year ARM is one of the more used ARM options, simply because of the attractive monthly payment, and the length of time the homeowner has to build more equity in an affordable payment.

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 20 Year ARM allows the mortgage loan to operate as an adjustable rate mortgage for 20 years, automatically converting to a fixed rate loan after that 20 year period has expired, for another 5, 7, or 10 years.

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. 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.

All in all, if you are buying a home, and your income level is expected to increase over the next 10 to 15 years, or your expenses are going to drastically decrease, you would probably benefit from the standard 20 Year 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. The 20Year ARM is a good, solid product that allows the homeowner to build equity, with a low interest payment each month, while also providing the lending institution the opportunity to reset an interest rate, if they should begin to rise quickly. This is one of the greatest reasons banks tend to promote the ARMs as much as they do the standard FRMs: they're fairly safe, time-tested products.