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Benefits To An Adjustable Rate Mortgage

With today’s mortgage crisis, many people are afraid of the adjustable rate mortgages. These types of loan programs, also known as ARM loans, have received bad publicity in the news. With all the terrible media reports about ARM loans, several people have decided to only apply for a fixed rate mortgage.

But the adjustable rate mortgage program is a good mortgage program. Understanding how the program works and why you would want to think about the mortgage program is important when looking at all your mortgage loan options. The ARM loan could save you money.

Understanding How An Adjustable Rate Mortgage Works

First off, you need to understand how the adjustable rate mortgage program works. For starters, most ARM loan programs have an initial time period that the rate is fixed. These time periods are normally between 3-7 years. At this time, most ARM programs offer fixed rates for the first 3, 5, and 7 years. During this time, the interest rate of the mortgage loan cannot change.

What Makes Up The New Loan Interest Rate

After the initial fixed rate period is over, the ARM loan rate can change. The new home mortgage loan interest rate is based on the index plus the margin. The interest rate index is the specific fund/security that your interest rate on an adjustable rate mortgage is tied to. Margin is the amount a lender adds to the index on an Adjustable Rate Mortgage (ARM) as profit to establish the adjusted interest rate.

Once the loan adjust, the new rate is based on today’s index plus the margin set by the loan company at time of closing. The rate can adjust every 6 or 12 months, depending on what the mortgage note states. Most ARM loans have caps on how much the interest rate can change and what the maximum rate can be charged.

The Reason To Consider An Adjustable Rate Mortgage

The reason behind the ARM loan is to have the loan only during the fixed rate period. This type of loan is designed for clients who are only going to keep the mortgage for a short period of time. If you are only planning on staying at the home for 5 years, then an ARM loan will save you more money compared to a fixed rate home loan. Many ARM loan programs offer rates starting lower than a fixed rate mortgage. The savings per month on the monthly payment is a major benefit to the adjustable rate mortgage.

Keep in mind that this type of home loan program is not designed to be kept for the entire term of the mortgage. Obviously, some people will keep an ARM loan beyond the initial fixed rate period and if you do so, you need to be able to budget for a possible rise in payment.

Understanding The Risk Involved

What got several homeowners in trouble with the ARM loans is that many people were going with the ARM loan as the only way to get approved for the mortgage. Once the loan reached the adjustment period, many homeowners could not afford the new payment. Make sure that when you look at the ARM loan program, that you can afford the highest possible payment. Many lenders now have guidelines set in place that require the lender to approve a homeowner based on the highest possible payment.

Again, the main reason to do an ARM loan is that you are only planning on keeping or staying in this loan for a short period of time. If you want to keep the loan for a longer period of time, then a fixed rate loan is your best option.

Talk to your home loan consultant today to see which mortgage program is best for you.