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Adjustable Rate Mortgages - Understand the Benefits Compared
to a Fixed Rate Mortgage
Adjustable rate mortgages can be very tempting to home buyers,
yet they carry a great deal of uncertainty. Fixed rate mortgages
offer rate and payment security, but they are more expensive. It
is important to weigh the pros and cons of ARMs and fixed rate
mortgages before you decide which is right for you.
There are many benefits with an adjustable rate mortgage. One
benefit is that they usually feature lower rates and payments
early on in the loan term. Lenders can use the lower payment when
qualifying borrowers, therefore borrowers can purchase larger
homes than they could otherwise afford. ARM's allow borrowers to
take advantage of falling rates without refinancing. Instead of
having to pay closing costs and fees, borrowers can just sit back
and watch their rates fall without worrying about these extra
costs. Adjustable rate mortgages can help borrowers save and
invest more money. Someone who has a payment that is say $200
less with an ARM than with a fixed-rate mortgage for a couple of
years can save that money and earn more off it in a higher
yielding investment. This type of mortgage also offers a cheap
way for borrowers who don't plan on living in one place very long
to buy a house.
There are also a few drawbacks with Adjustable rate mortgages.
One drawback is that rates and payments can rise significantly
over the loan period. For instance, a 6% ARM can end up at 11% in
just three years if rates rise in the overall economy. A
borrower's initial low rate will adjust to a level higher than
the going fixed rate level in almost every case because ARMs have
initial fixed rates that are set artificially low. The first
adjustment can be hard hitting because some annual caps don't
apply to the initial change. Someone with an annual cap of 2% and
a lifetime cap of 6% could potentially see the rate shoot from 6%
to 12% in 12 months after closing rates in the economy skyrocket.
Adjustable rate mortgages can be difficult to understand.
Lenders have much more flexibility when determining margins,
caps, adjustment indices and other things, so new borrowers can
easily get confused or trapped by less than honest mortgage
companies. One last drawback to adjustable rate mortgages is that
on certain mortgages called negative amortization loans,
borrowers can end up owing more money than they did at closing.
This is because the payments on these loans are set so low they
only cover part of the interest due. Any additional amount will
get added into the principal balance.
As you can see there are many pros and cons to adjustable-rate
mortgages. You must carefully consider your options before
choosing a mortgage that is right for you. Stay informed of all
of your mortgage options.
To view our list of most recommended mortgage lenders, visit
this page: Recommended
Home Mortgage Lenders
Carrie Reeder is the owner of ABC Loan Guide. It is an
informational loan website, with informative articles and the
latest finance news.
 MORE RESOURCES updated Thu. February / 09 / 2012
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New HARP Could Help Up to 6.7 MillionNASDAQOther changes to the program were designed to make it easier for homeowners with private mortgage insurance (PMI) to refinance or to obtain a HARP mortgage refinance with a lender other than their current mortgage servicer. In addition, new limits were ...and more » |
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