Adjustable Rate Mortgages - Information and Advice

"Adjustable versus fixed rate mortgages - pros and cons."

Why Adjustable Rate Mortgages become more popular as interest rates go up.

Adjustable Rate Mortgages offer safety and affordability. Check Today's ARM Rates Now

Adjustable Rate Mortgages ( ARM loans ) give the borrower a lower payment in exchange for sharing the market risk over time. Adjustable rate mortgages are a very popular way of home financing when interest is high or rising because the homeowner can enjoy a lower payment to start with.

After the initial fixed term of the ARM loans, usually 1 to 7 years, the borrower can either refinance or sell the property without a pre-payment penalty in most cases. If the borrower does not intend to keep the ARM loan long term, Adjustable Rate Mortgages are the perfect financing option.

This is because 30 and 15 year fixed interest programs are the most expensive on the market. If you don't need long term financing, why pay for it? Interest Only payments are also available on these types of financing options.

Qualifying is another issue. Home buyers can qualify much more easily at the lower start rate on adjustable rate mortgages, thus being able to purchase a more expensive home. If that dream home seems just out of reach, an ARM loan may make it possible.

From an investment and appreciation standpoint, buying a more expensive home will pay higher profits when it's time to sell.
 

Are ARM loans safe?

Very much so, now.

Adjustable rate mortgages got a bad reputation when they first came out because they had no periodic or lifetime adjustment CAPS ( a limit as to how much the payment and or rate can increase ).

On average, adjustable rate mortgage caps are 2% in interest each adjust period or a 7.5% max increase in the P&I payment. These are maximum jump caps but your payment could actually go down. The maximum increase over the life of the ARM loan is usually 5 to 6% over the start rate.

These caps allow you to compute the worst cast scenario on payments. If you can handle that, regardless of it's likelihood, you're in good shape. If you can't handle the worst case over the time you expect to keep the home, give this type of financing a second thought.

Just because you can get it, doesn't mean you should. Don't over commit yourself to any home loan, be it fixed or adjustable, without sufficient reserves to cover three months of living expenses.

Remember, layoffs or accidents can happen to anyone!
 

Indexes and Indices used in ARM's

An ARM loan will adjust periodically depending on the index used. The index is the base to which the "margin" ( lenders profit margin ) is added to get to the "note rate".

Index + Margin = Interest %

Margins can vary widely so shop around.

There are many different indices used in ARM loans.

These indices are published in most daily newspapers and can be obtained easily. A few are the 3 month, 6 month, 1 year T-Bills. Others include the COFI ( Cost Of Funds Index ) and the LIBOR ( London InterBank Offered Rate ).

Almost one-third of applicants these days are getting adjustable rate financing. The hardest to understand element of an ARM is the index.

A thorough shopper will run across a bunch of acronyms to denote various ARM indexes, such as COFI, LIBOR, MAT and CMT. Each responds at its own peculiar pace to the economy's fluctuations.

Indexes can be divided into two broad categories. Those that are based upon averages and those that are based upon the more volatile spot market. There is some overlap between the two categories.

ARMs indexed to averages will tend to move more slowly and in rather gradual steps, whether the markets are rising or falling. ARMs based on the spot market will go up and down abruptly.

Choose the adjustable rate mortgage that's best for your situation and finances. For many people they are a much better option simply because the average family moves to a new home once every five years.

 

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