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Adjustable rate mortgages are long term mortgage loans with variable interest rates. They have a schedule of principal and interest payments just like a fixed mortgage, but the interest rate may be adjusted at regular intervals during the term of the loan. Therefore, the monthly payments are likely to move up and down as the rate is adjusted.
An ARM is an important financing alternative for first and second mortgages. In addition, many home equity loans are structured as adjustable rate mortgages.
In addition to the contract interest rate, discount points, loan to value ratio, and maturity, ARMs have their own unique set of terms:
- Adjustment Interval: most ARMs are adjusted at regular intervals stated in the mortgage contract. In between these intervals, the interest rate on the loan is constant. The shorter the interval, the more sensitive the loan is to changing interest rates. Most first ARMs are adjusted annually
- Initial Interest Rate: all ARMs have an interest rate that is fixed until the first adjustment date. Sometimes this rate is set low to attract borrowers, called a teaser rate. Therefore, the initial interest rate does not indicate the long term cost of the loan.
- Convertibility: some ARMs provide the borrower with the option to convert to a fixed rate loan during the loan term.
Because your payments almost always rise later on, some detractors call it a compact with the devil. Nonetheless, an Arm in some markets can cut your initial payments by as much as a third. That can mean the difference between being able to purchase and being left out in the cold.
The best way to understand an ARM is to compare it to a fixed-rate mortgage. With a fixed-rate mortgage you always know where you stand. Your interest rate and your monthly payment remain constant for the life of the loan whether it is for 3 years or 30 years.
With an ARM, it’s quite different. Your interest rate fluctuates, it moves up and down depending on market conditions. Your monthly payment, which reflects the interest rate, likewise can vary up or down over the life of the loan.
Given a choice between a mortgage where you never know what your monthly payment is going to be, and a mortgage where the monthly payment is fixed, any reasonable person would opt for the fixed-rate mortgage. The real key to deciding whether or not to get an ARM is how long the teaser rate lasts. If you get an initial low interest rate and payment for just 1 month, and then it goes up, you have accomplished almost anything.
On the other hand, if the low monthly payment lasts for several years, it can be just the right thing, particularly if you sell or refinance when the teaser expires. In fact you want the teaser to be for as long as possible so you get a lower monthly payment than you otherwise would get. Second, you hope that once the teaser evaporates and your interest rate and payment go up, you can refinance to another ARM with another low teaser.
About The Author
Stefano Sandano is a home equity loan expert and if you want to know more about mortgages and loans you can visit http://www.homequity-loan.com.
Hey Readers! I’ve been comin across some crazy stuff the past few days from a few different blogs around the web which I just had to share with you. Check em out below…
Mortgage Rates Move Lower | Free Investment Advice
The average 15-year fixed mortgage fell to 4.67 percent while the larger jumbo 30-year fixed rate inched lower to 6.14 percent. Adjustable rate mortgages were mixed, with the average 3-year ARM rising to 4.80 percent and the 5-year ARM …
Mortgage Rates Lower, Stable in Q1 2010 | Nashville Real Estate
Freddie Mac reports that 30-year fixed mortgage rates averaged 5.09 percent, down from 5.14 percent a week ago and compared with 5.01 percent in 2009. Also, 15-year, fixed loans fell 0.4 percent to 4.5 percent; five-year adjustable-rate …
Mortgage Rates Fall This Week | PropertyMaps Corporate Blog
Freddie Mac reports that 30-year fixed mortgage rates averaged 5.09 percent, down from 5.14 percent a week ago, but higher than the 5.01 percent it reached this time last year. Other mortgage rates performed as follows: …
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I hope you’ve been enjoying my posts lately. I thought I might do something different today and rustle up a few bits of info from around the WWW. These are some of the news items and blog posts that have been popular over the last few weeks. Leave me your thoughts.
Today's Lowest Mortgage Interest Rates – 15 Year Fixed Mortgage Rates at 4.35%
Today's lowest mortgage interest rates are around 4.95% on a 30 year fixed rate mortgage and 4.35% on 15 year fixed mortgage rates. … Read More…
Mortgage Rates Mostly Fall This Week; 30-Year Fixed at 5.09%
Mortgage rates declined this week after a month of gains, with the average rate on 30-year fixed-rate mortgages retreating closer to 5%, … Read More…
Mortgage Bonds 'Leading the Pack' as Debt Rallies
Fixed-rate prime-jumbo mortgage bonds rose 2 cents to 86 cents last week, up from a low of 63 cents in March. Commercial-mortgage securities and high-yield … Read More…
That’s all the news for today guys, so until next time, thanks for stopping by.
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