Adjustable Rate Mortgages - Understand the Benefits Compared to a Fixed Rate Mortgage
Adjustable rate mortgages can be very tempting to home buyers, yet they carry a great deal of uncertainty. Fixed rate mortgages offer rate and payment security, but they are more expensive. It is important to weigh the pros and cons of ARMs and fixed rate mortgages before you decide which is right for you. There are many benefits with an adjustable rate mortgage. One benefit is that they usually feature lower rates and payments early on in the loan term. Lenders can use the lower payment when qualifying borrowers, therefore borrowers can purchase larger homes than they could otherwise afford. ARM's allow borrowers to take advantage of falling rates without refinancing. Instead of having to pay closing costs and fees, borrowers can just sit back and watch their rates fall without worrying about these extra costs. Adjustable rate mortgages can help borrowers save and invest more money. Someone who has a payment that is say $200 less with an ARM than with a fixed-rate mortgage for a couple of years can save that money and earn more off it in a higher yielding investment. This type of mortgage also offers a cheap way for borrowers who don't plan on living in one place very long to buy a house. There are also a few drawbacks with Adjustable rate mortgages. One drawback is that rates and payments can rise significantly over the loan period. For instance, a 6% ARM can end up at 11% in just three years if rates rise in the overall economy. A borrower's initial low rate will adjust to a level higher than the going fixed rate level in almost every case because ARMs have initial fixed rates that are set artificially low. The first adjustment can be hard hitting because some annual caps don't apply to the initial change. Someone with an annual cap of 2% and a lifetime cap of 6% could potentially see the rate shoot from 6% to 12% in 12 months after closing rates in the economy skyrocket. Adjustable rate mortgages can be difficult to understand. Lenders have much more flexibility when determining margins, caps, adjustment indices and other things, so new borrowers can easily get confused or trapped by less than honest mortgage companies. One last drawback to adjustable rate mortgages is that on certain mortgages called negative amortization loans, borrowers can end up owing more money than they did at closing. This is because the payments on these loans are set so low they only cover part of the interest due. Any additional amount will get added into the principal balance. As you can see there are many pros and cons to adjustable-rate mortgages. You must carefully consider your options before choosing a mortgage that is right for you. Stay informed of all of your mortgage options. To view our list of most recommended mortgage lenders, visit this page: Recommended Home Mortgage Lenders Carrie Reeder is the owner of ABC Loan Guide. It is an informational loan website, with informative articles and the latest finance news.
Related News
Looking to refinance? Now might be the time - Boston Globe
Looking to refinance? Now might be the timeBoston Globe, United States -1 hour agoMortgage rates have been stubbornly high for quite some time but the government's recently announced $800B plan to bolster mortgages and consumer loans had ... |
Commercial loan "nightmare" projected for 2009-JPMorgan - Reuters
General Growth Properties gets loan reprieve - The Associated Press
Borrowers get gift of lower mortgage rates - Seattle Post Intelligencer
Mortgage rates fall, but many borrowers will have trouble qualifying - Los Angeles Times
Avoiding your own mortgage collapse - The News Journal
Avoiding your own mortgage collapseThe News Journal, DE -11 hours agoBy ANDREW EDER • The News Journal • December 1, 2008 It used to be that homeowners struggling to meet their mortgage payments had two options -- refinance... |
See if lender will let you pay insurance, taxes - San Francisco Chronicle
See if lender will let you pay insurance, taxesSan Francisco Chronicle, USA -5 hours agoI almost feel like the mortgage companies are just trying to get extra money from us by having us refinance soon. Even in this economy, this house would ... |
Good time to refinance your mortgage? - WKTV
Good time to refinance your mortgage?WKTV, NY -2 hours agoBy GARY LIBERATORE (WKTV) - If you are in the market to buy a home, it's a really good time, but if you're selling, it's not so good. ... |
Wolters Kluwer Financial Services Begins Development of Hope for ... - MarketWatch
Bellingham man's adjustable mortgage became money trap - Bellingham Herald
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