Adjustable Rate Mortgage Loans
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 incomes to rise or move in a couple of years, an ARM also increases the risk of rising payments. Fortunately, lenders also offer some safeguards to limit their risk of excessively high interest rates.
ARM Features
A mortgage begins with a low interest rate to 3% lower than a fixed rate mortgage. With lower rates, generally, the requirements to borrow more than with a fixed rate loan at home.
ARMs usually start with a fixed rate period and end with fluctuations in the annual interest rate, increasing or decreasing your monthly payment. So a 3 / 1 ARM means 3 year fixed-rate interest rates change every year thereafter. Interest rates are based on an index, usually the rate at T-bill or LIBOR, and the margin that the lender adds to the index.
ARM Safeguards
In order to protect borrowers monthly payments sky rocket, mortgage lenders establishing guarantees. For example, a knit cap limits how much interest rates can go up monthly during the term of the loan. There are also limits on how low rates can go, protecting the lender.
Another precaution is a cap of dollars in monthly payments. However, if interest rates rise higher than the dollar cap allows, you may end up with a long loan. Many finance companies also allows you to convert your ARM to a fixed rate mortgage after a predetermined period.
ARM Considerations
While a mortgage has many advantages, there are other considerations in view. For example, interest rates may rise by 4% or more in the course of your mortgage. If you plan to stay at home for several years, a fixed rate may offer lower interest costs over time. ARM are also unpredictable, which makes the planning of long-term goals of funding difficult.
Before applying for a mortgage, make sure you are comfortable with the level of risk involved. However, if you expect your income to increase in the future or to move, then you may be saving a lot of money in interest payments with a mortgage.
