Adjustable Rate Mortgage Loans Understanding The Basics

Adjustable Rate Mortgage Loans - Understanding the​ Basics
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 income to​ rise or​ move in​ a​ couple of​ years,​ an​ ARM also increases your risk for higher payments .​
Fortunately,​ lenders also offer safeguards to​ limit some of​ your risk to​ excessively high interest rates.
ARM Features
An ARM starts with a​ low interest rate,​ up to​ 3% lower than a​ fixed rate mortgage .​
With lower rates,​ you​ usually qualify to​ borrow more than with a​ fixed rate home loan.
ARMs usually start with a​ fixed rate period and end with fluctuating yearly interest rates,​ increasing or​ decreasing your monthly payment .​
So a​ 3/1 ARM means 3 years of​ fixed rates with interest rates changing every year after that .​
Interest rates are based on​ an​ index,​ usually the​ rate on​ the​ T-bill or​ LIBOR,​ and the​ margin the​ lender adds to​ the​ index.
ARM Safeguards
In order to​ protect borrowers from sky-rocketing monthly payments,​ mortgage lenders put in​ place safeguards .​
For example,​ a​ point cap limits how much interest rates can rise monthly and over the​ life of​ the​ loan .​
There are also ceiling limits on​ how low rates can go,​ protecting the​ lender.
Another safeguard is​ a​ dollar cap on​ monthly payments .​
However,​ if​ interest rates rise higher than the​ dollar cap allows,​ you​ may end up with a​ longer loan .​
Many financing companies also allow you​ to​ convert your ARM to​ a​ fixed rate mortgage after a​ predetermined period.
ARM Considerations
While an​ ARM has many benefits,​ there are other considerations to​ look at .​
For instance,​ interest rates can rise 4% or​ more over the​ course of​ your home loan .​
If you​ plan to​ stay in​ your home for several years,​ a​ fixed rate may offer lower interest costs in​ the​ long term .​
ARMs are also unpredictable,​ which makes planning long term financing goals difficult.
Before you​ apply for an​ ARM,​ make sure you​ are comfortable with the​ level of​ risk involve .​
However,​ if​ you​ expect your income to​ rise in​ the​ future or​ to​ move,​ then you​ may be saving yourself a​ lot of​ money in​ interest payments with an​ ARM.

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