Adjustable Rate Mortgages

2006-10-18T20:16:00.000-07:00

ARM or Fixed Rate Mortgage?

October 19th, 2006

The Adjustable Rate Mortgage (otherwise known as an ARM) may be a loan that helps you purchase your home and afford the monthly payments. An Adjustable Rate Mortgage is a mortgage that starts out with a low interest rate, and then increases as the years go by. For example, a mortgage that starts out 6% will not still be 6% by the time it is paid off.

There are pros and cons of obtaining an Adjustable Rate Mortgage.

Pros Of Obtaining an Adjustable Rate Mortgage

1) The initial low rate allows the buyer to qualify more easily for the loan or leverage into a more expensive property than he or she could otherwise afford.

2)Some Adjustable Rate Mortgages can be converted to Fixed Rate Mortgages during a specific time frame in the loan.

3) Initial lower than market teaser rates may drastically reduce the borrowers monthly payment in the first year.

4) Some lenders keep ARMs in portfolio, allowing the buyer to request special concessions of the lender, such as no PMI or no reserves account for taxes and insurance. Adjustable Rate Mortgages are good to use in times of low inflation as well as for short term ownership.

Cons Of Obtaining an Adjustable Rate Mortgage

1) Depending on the loan program, the buyer may qualify at the second year rate, not the initial rate.

2) There are no interest rate guarantees because indexes fluctuate with the economy.

3) The buyer’s financial situation may change after the loan is cast, making payment increases financially prohibive for the borrower.

The Qualifying Process

Because interest rates for ARMs tend to be lower than the fixed rate loans, it is often easier to qualify for an ARM. Many lenders, however, work with the secondary market guidelines that require a borrower to be qualified at the first adjustment period rate if the loan has 2 percent annual adjustment caps.

Conclusion

In conclusion, the decision to obtain an Adjustable Rate Mortgage or a Fixed Rate Mortgage all depends on your financial situation at the time of borrowing. Finding a good lender who will work with you and help you to understand all aspects of the loan process is also helpful.