Adjustable Rate Mortgage Loans - Understanding The Basics
Written by: Carrie Reeder
Adjustable rate mortgages (ARM), developed when mortgage
interest rates were high, can help you finance the purchase of a
home with low interest rates. An ideal choice for those who
expect their income to rise or move in a couple of years, an ARM
also increases your risk for higher payments. Fortunately,
lenders also offer safeguards to limit some of your risk to
excessively high interest rates.
An ARM starts with a low interest rate, up to 3% lower than a
fixed rate mortgage. With lower rates, you usually qualify to
borrow more than with a fixed rate home loan.
ARMs usually start with a fixed rate period and end with
fluctuating yearly interest rates, increasing or decreasing your
monthly payment. So a 3/1 ARM means 3 years of fixed rates with
interest rates changing every year after that. Interest rates
are based on an index, usually the rate on the T-bill or LIBOR,
and the margin the lender adds to the index.
In order to protect borrowers from sky-rocketing monthly
payments, mortgage lenders put in place safeguards. For example,
a point cap limits how much interest rates can rise monthly and
over the life of the loan. There are also ceiling limits on how
low rates can go, protecting the lender.
Another safeguard is a dollar cap on monthly payments. However,
if interest rates rise higher than the dollar cap allows, you
may end up with a longer loan. Many financing companies also
allow you to convert your ARM to a fixed rate mortgage after a
While an ARM has many benefits, there are other considerations
to look at. For instance, interest rates can rise 4% or more
over the course of your home loan. If you plan to stay in your
home for several years, a fixed rate may offer lower interest
costs in the long term. ARMs are also unpredictable, which makes
planning long term financing goals difficult.
Before you apply for an ARM, make sure you are comfortable with
the level of risk involve. However, if you expect your income to
rise in the future or to move, then you may be saving yourself a
lot of money in interest payments with an ARM.
About the author:
See my recommended Home
Mortgage Lenders online. Carrie Reeder is the owner of ABC
Loan Guide, which offers help finding the best home mortgage loans.
New Home Construction Loans 101
When you are ready to build your first home or that dream home
that you have been wanting for so long you will probably wind up
needing help with the financial part of the building process.
The funding for your new home is available through new...read more
Home Equity Loan Refinance - Important Facts
Refinance refers to applying for a secured loan intended to
replace an existing loan secured by the same assets.You must
speak with a finacial advisor before you decide to refinance.
Refinancing the loan you had taken at higher rates is a...read more
Why a Debt Reduction Loan makes good financial sense
There are many good reasons why a debt reduction loan makes good financial sense. Many people carry a number of credit cards with high balances and high interest rates. Making even the minimum required monthly payment can be difficult. Credit cards...read more
Return to Home