Adjustable Rate Mortgages - ARMs - Advantages
Adjustable Rate MortgagesAdjustable Rate Mortgages ARMS
- With a conventional fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an Adjustable Rate Mortgage ARMs, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly. Lenders generally charge lower initial interest rates for Adjustable Rate Mortgages ARMs than for fixed-rate mortgages.
Adjustable Rate Mortgages ARMs - Advantages
This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make the decision about whether to extend a loan on the basis of your current income and the first year’s payments. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage—for example, if interest rates remain steady or move lower.
Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It’s a trade off you get a lower rate with an Adjustable Rate Mortgage in exchange for assuming more risk.
Adjustable Rate Mortgages ARMs - These loans have a fixed period during which time the payments are fixed and level. As an example, a 5/1 Adjustable Rate Mortgage is fixed for the first five years, then becomes a 1 Yr. adjustable rate from years 6 - 30, adjusting every year to a new rate, subject to annual and lifetime caps on increases and decreases. The adjustment each year after the initial fixed rate period is determined by this formula; Rate = Index plus Margin.
The 2 most common index is the US 1 Year Treasury Constant Maturity or the Prime Rate. The margin is determined by the lender, these rates will vary according to market conditions. Rate adjustment caps generally apply to limit increases in rate per adjustment and over the life of the loan. ARMs are for the more sophisticated borrower who knows the length of time in the property is limited or knows that a refinance opportunity will occur during the initial fixed rate period of the Adjustable Rate Mortgage.
Adjustable Rate Mortgages ARMS
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