Why Would You Choose An Adjustable Rate Mortgages
Adjustable rate mortgages (ARM) have been a popular form of mortgage financing in recent years
. These mortgages start out at low rates for a set period; then adjust along with the index to which they are tied. As interest rates go up, so do the monthly payments. The index to which the interest rate is tied varies from lender to lender. These hybrid ARM loans have an initial fixed period that will be determined by the program you select. The first number represents the number of years the rates are fixed. The second number indicates the adjustment interval (how often the interest rate will change in the adjustable phase of the loan). For a 7/1 loan, the fixed period is seven years with annual interest rate adjustments thereafter. These loans carry a 30 year term. In short, adjustable
rate
mortgages may result in a higher risk to the borrower initially, but an opportunity to take advantage of lower rates in the future. In most cases, buyers are given the opportunity to "lock in" to a fixed rate at some point during the term of the contract.
Interest only mortgages are becoming very popular especially for first time home buyers who request these loans due to not being able to afford the monthly payments of regular mortgage loans. This is a popular choice for people who would struggle to meet the mortgage repayments every month, or those who are confident that their investments will provide enough to cover the capital payment at the end of the term. The danger could be that if your investment plan does not perform well, you may be left without enough to buy your house after the 25 years are up a time when most people are facing retirement. Loans normally have repayments which are composed of both capital and interest. Interest only mortgage loans carry only interest during the first part of the repayment program. This implies that for the first few years, the mortgage monthly payments can be kept low enough to be affordable with almost any budget.
Why would you choose an ARM?
1. Interest rates are currently among the lowest in history and adjustable rate mortgage loans
is probably one way to bring them even lower. The first thing you may want to do is to get many free mortgage quotes, online, for comparison. An adjustable rate mortgage has a fixed period where the rate wont change, typically 3, 5 or 7 years. The rate could be lower, often much lower, than the popular 30-year fixed rate mortgage. The marketplace rate for adjustable
rate
mortgages today may be lower by a wide margin than for a conventional 30-year FHA mortgage.
2. If homeowners know that they are only in a fixed-rate period for a short amount of time, an adjustable rate mortgage may be best used if you know you are moving before the fixed-rate period is over, if you plan on using the money protected by the lower interest rate to pay more towards your insurance premium or if youre planning on refinancing before the adjustable rate mortgage begins to adjust.
3. Including closing costs on a refinance, you would still saving money over a traditional mortgage. For example on a $100,000 home loan, if you were to get a 30-year fixed-rate mortgage at 4.75%, your monthly payments would be $522 a month. If you were to get a 5-year ARM at 3.5%, your monthly payments would be $498 for a 5-year savings of $4,350. Even adding in closing costs, you would have been ahead with money.
4. ARMs can adjust downwards. Most people assume that after the fixed period expires, their rate may rise. This is not always the situation. For example you could start with a 5-year ARM at 4.25 percent and when it becomes time for the rate to adjust; housing costs may be way much lower. This can prove to be an advantage for you as you could cough up a bit of the savings towards the principle of your house, or use the cash to pay off bills.
5. Adjustable rate mortgages are generally more popular. In the United States, many financially savvy people may choose an adjustable rate mortgage, mainly because you may save money. Early reduction payments reduce the total cost of the loan and allow you to pay off your loan faster. You could get an online mortgage quote and learn firsthand how you would come out ahead.
by: Ask Bill
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