Adjustable Rate Mortgage Loans

Adjustable Rate Mortgage Loans, also commonly referred to as ARM’s, have quickly become one very popular and strategic loan strategies for combating the rising costs of homes. It has become an extremely effective method for prospective home buyers to reach their dreams of home ownership. The ARM is appealing because it provides rates that are not so high at the beginning of the loan term but runs the risk of increasing rates later on in the loan term.

The best times to consider an ARM as a financing option is usually when you are expecting your income to increase in the near future, or during a season when interest rates are high, or especially when you are expecting to either live in the home for a short time or when you expect to refinance in the near future. Due to the fact that the home owner can expect interest rates and therefore payments to increase either at various intervals; homebuyers that are evaluating an adjustable rate mortgage loan strategy need to be financially prepared to handle all possible rate and payment adjustments. Every Adjustable Rate Mortgage Loan has 4 standard components:

• The first component is the initial interest rate. This can usually be expected to be one to three percentage points lower than most standard fixed rate mortgages. Opening the loan term with lower interest rates also makes ARM’s somewhat easier to qualify for. The beginning interest rate is tied to certain market indicators that will determine what your monthly payments will be.

• Adjustment interval is the amount of time between changes in the interest rate and/or the monthly payment which is usually one year, three years, or five years.

• Index is a published interest rate which lenders use to measure the differences between what they are making on their investment in the mortgage and what they could be making on other investment types.

• Margin, which is how much additional is added by the lender to the index to create the adjustable interest rate on Adjustable Rate Mortgage. There is usually a 1.5% to 2.5% margin.

Now that we have covered the four basic components of an adjustable rate mortgage loan an ARM also contains certain consumer safeguards like an interest rate cap that limits the amount that an interest rate applied to the payment may move. This interest rate cap stops the measure of interest that the consumer pays from rising higher than what the homeowner could perhaps afford. For example, a standard ARM would have a 2% point cap per year over the life of the loan. Here are some facts about adjustable rate mortgage loans.

An additional safeguard found on some ARM’s are monthly payment caps that actually limit the amount that homeowners have to increase their monthly payments at adjustment time. At the same time however, sometimes monthly payment caps prevent the monthly payments from rising enough to keep up with the rise in the interest rate which causes negative amortization resulting in a higher or more payments for the homeowner later on.
When shopping for an ARM some of the other options you should clarify are whether or not you may transfer the adjustable rate mortgage loan to a new homebuyer, usually with the same loan terms as long as the new homebuyer qualifies for the loan. ARM’s are almost always assumable. You also need to make sure that convertibility allows the borrower to convert the ARM to a fixed rate mortgage. This usually is allowed at the end of some predetermined period, locking in a lower interest rate