Interesting information about ARMs
Buying a home and deciding how to finance it go hand in hand. Wading through the muddy waters of the mortgage world can be very hard to do – there are just way too many options to pick from.
The type of mortgage product you choose can have an overwhelming effect on your monthly payments, interest rate and length of your loan.
One type of mortgage that has been making headlines in the news lately is the adjustable-rate mortgage or ARM. This type of mortgage has many benefits and drawbacks, and it is important to research this type of loan thoroughly before signing any papers.
An article by Janet Wickell of about.com, “How to decide if an ARM is right for you,” gives some basic facts and information on this alternative type of loan.
“(An ARM) is a mortgage with an interest rate that is linked to an economic index. The interest rate, and your payments, are periodically adjusted up or down as the index changes.”
The reason why this mortgage product has been in the news lately is because the interest rates for thousands of ARMs are posed to reset this fall, meaning higher monthly payments for a lot of people.
When people first hear about this mortgage, some wonder why anyone would choose a mortgage in which their payments could increase.
Well, there are a few reasons someone may do this, and one is that there initial payments are lower than fixed-rate mortgages. So, people who are strapped for cash often choose an ARM for its initial low monthly payments in hopes that their income will increase in the future when the rates go up.
The initial interest rate for an ARM is lower than that of a fixed rate mortgage, where the interest rate remains the same during the life of the loan. A lower rate means lower payments, which might help you qualify for a larger loan.
“How long do you plan to own the house? The possibility of rate increases isn't as much of a factor if you plan to sell the home within a few years. Do you expect your income to increase? If so, the extra funds might cover the higher payments that result from rate increases. Some ARMs can be converted to a fixed-rate mortgage. However, conversion fees could be high enough to take away all of the savings you saw with the initial lower rate.”
Before you apply for an ARM, make sure you look at the interest rate caps section on your loan application. Some lenders use caps, some do not.
Caps are important because they determine just how high your interest rates can go in terms of your loan.
“Rate caps limit how much interest you can be charged. There are two types of interest rate caps associated with ARMs. Periodic caps limit the amount your interest rate can increase from one adjustment period to the next. Not all ARMs have periodic rate caps. Overall caps limit how much the interest rate can increase over the life of the loan. Overall caps have been required by law since 1987.”
Whatever type of loan you decide to take out be sure you know what you are getting yourself into or you could be in for a bumpy road ahead.
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