Adjustable Rate Mortgages
How Can I determine If I Want an Adjustable Rate Mortgage, or Not?
You May Wish to Choose an ARM If:
You Can Establish a Comfortable Payment Range.
You Know You Are on the Fast Track and That Your Income Is Growing.
You Plan on Moving or Refinancing the Loan in Less Than 5 Years
Arms do offer numerous benefits that can ease your mortgage's burden. Initially the interest rate on these loans is typically more affordable than that of a fixed rate mortgage. So, your monthly responsibilities are also lessened.
Plus, when your monthly payments carry less responsibility it only follows that getting approved is an easier process. And, a lot of the time the lender will allow you to borrow higher amounts.
This Is a Welcome Event If You Are:
You must always keep in mind that the lower rates and lower payments may fluctuate. Every ARM agreement stipulates that lender's can adjust the rate at a specific time. This is known as the adjustment period.
These adjustment periods for ARM loans can start as early as 1 month after signing and extend up to several years in the future. One rule of thumb is this, the shorter the adjustment period, the lower the initial interest rate will be.
Example being: a 1 month ARM often comes with a lower initial interest rate than does a 6-month or 1 year ARM.
What degree of fluctuation is considered to be normal? ARM rate changes are tied to the economy and its fluctuations; lenders base your new rate on those factors.
An interest rate index, which is published and not controlled by lenders, is employed to determine the amount of change plus a small margin.
Some Examples of Indices Are:
Fluctuations in the interest rates that cause them to decrease are always welcome news. But when interest rates increase, some times to much higher levels, what can you expect? The majority of Arms have rate caps to protect you just for this reason.
Two Specific ARM Rate Caps to be Aware of Are:
The Adjustment Period Cap
The Lifetime Cap