Understanding Your Loan Options And Reasons To Consider An Adjustable Rate Mortgage
Written by Dr. Wealth on September 7th, 2010
With today’s home loan crisis, many people are scared of the adjustable rate mortgages. These types of home loan programs, also known as ARM loans, have received negative publicity in the news. With all the bad news reported about ARM loans, many people have decided to only apply for a fixed rate mortgage.
But the adjustable rate mortgage program is a good loan program. Understanding how the program works and why you would want to think about the loan program is crucial when looking at all your home loan options. The ARM loan could save you money.
Understanding How An Adjustable Rate Mortgage Works
First off, you need to know how the adjustable rate mortgage program works. For starters, most ARM loan programs have an initial time period that the rate is fixed. These time periods are normally between 3-7 years. At this time, most ARM programs offer fixed rates for the first 3, 5, and 7 years. During this time, the interest rate of the mortgage loan cannot change.
What Makes Up The New Loan Interest Rate
After the initial fixed rate period is over, the home loan rate can change. The new home mortgage loan interest rate is based on the index plus the margin. The interest rate index is the specific fund/security that your interest rate on an adjustable rate mortgage is tied to. Margin is the amount a mortgage company adds to the index on an Adjustable Rate Mortgage (ARM) as profit to establish the adjusted interest rate.
Once the loan adjust, the new interest rate is based on the current index plus the margin set by the lender at time of closing. The rate can adjust every 6 or 12 months, depending on the terms of the loan note. Most ARM mortgages have caps on how much the interest rate can change and what the highest rate can be charged.
The Reason To Consider An Adjustable Rate Mortgage
The idea behind the ARM loan is to have the loan only during the fixed rate period. This type of loan is designed for clients who are only going to keep the loan for a short period of time. If you are only planning on staying at the property for 5 years, then an ARM loan will save you a lot of money compared to a fixed rate loan. Many ARM loan programs offer rates starting lower than a fixed rate mortgage. The savings per month on the monthly payment is a major benefit to the adjustable rate mortgage.
Keep in mind that this type of mortgage program is not designed to be kept for the entire term of the mortgage. Obviously, some homeowners will keep an ARM loan beyond the initial fixed rate period and if you do so, you need to be able to budget for a possible rise in payment.
Understanding The Risk Involved
What got several consumers in trouble with the ARM loans is that several homeowners were going with the ARM loan as the only way to get approved for the mortgage. Once the mortgage reached the adjustment period, many homeowners could not make the new payment. Make sure that when you look at the ARM loan program, that you can afford the highest possible payment. Many lenders now have guidelines set in place that require the lender to approve a consumer based on the highest possible payment.
Again, the main reason to do an ARM loan is that you are only planning on keeping or staying in this mortgage for a short period of time. If you want to keep the mortgage for a longer period of time, then a fixed rate loan is your best option.
Talk to your home loan professional today to see which mortgage program is best for you.
David White is a home loan consultant who specializes in Dallas Home Loans.
This entry was posted on Tuesday, September 7th, 2010 at 7:48 am and is filed under Huh?. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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