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Adjustable Rate Mortgages - Understand The Benefits Compared To A Fixed Rate
Mortgage
By: Carrie Reeder
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.
About the Author:
To view Carrie Reeder's list of most recommended mortgage lenders, visit this
page:
www.abcloanguide.com/lessthanperfectcredit.shtml. Carrie Reeder is the
owner of ABC Loan Guide. It is an informational loan website, with informative
articles and the latest finance news. |
