How An Adjustable Rate Mortgage Could Save You Money
With today's home loan crisis, many homeowners are afraid of the adjustable rate mortgages
. These types of loan programs, also known as ARM mortgages, have received negative publicity in the news. With all the terrible news reported about ARM loans, several consumers have decided to only go with a fixed rate home loan.
But the adjustable rate mortgage program is a good mortgage loan program. Knowing how the program works and why you would want to think about the mortgage program is important when looking at all your mortgage options. The ARM loan could save you money.
Knowing 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 usually 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 mortgage 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 loan is tied to. Margin is the amount a mortgage company 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 the current index plus the margin set by the loan company at time of closing. The rate can adjust every 6 or 12 months, depending on the terms of the loan note. Most ARM mortgages have caps on how much the interest rate can change and what the highest rate can be charged.
The Reason To Consider An Adjustable Rate Mortgage
The idea behind the ARM loan is to have the loan only during the fixed rate period. This type of loan is designed for consumers who are only going to keep the loan for a short period of time. If you are only planning on staying at the property for 5 years, then an ARM loan will save you a lot of money compared to a fixed rate loan. Many ARM loan programs offer rates starting lower than a fixed rate mortgage loan. The savings per month on the monthly payment is a major benefit to the adjustable rate mortgage.
Keep in mind that this type of mortgage program is not designed to be kept for the entire term of the mortgage. Obviously, some homeowners 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 payment increase.
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 consumers 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 qualify a person based on the highest possible payment.
Again, the main reason to do an ARM loan is that you are only planning on staying or keeping this mortgage for a short amount of time. If you want to keep the mortgage for a longer period of time, then a fixed rate loan is your best option.
Talk to your home loan advisor today to see which loan program is best for you.
by: David G White
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