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A step by step guide on how to take control of the mortgage process and also How to beat the brokers and avoid mortgage ripoffs. |
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Adjustable Rate Mortgages - Understand the Benefits Compared to a Fixed Rate Mortgage
Author: 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.
To view our list of most recommended mortgage lenders, visit this page: Recommended Home Mortgage Lenders
About the Author
Carrie Reeder is the owner of ABC Loan Guide. It is an informational loan website, with informative articles and the latest finance news.
Article Keywords:
Home Loans
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As you may know, I have a very deep passion for real estate and mortgages. In
fact, this website is a true labor of love for me.
As publisher, one my many duties is to review the many books, programs
and courses about real estate and mortgages that are on the market today. I’ll
be honest with you. Most of them are garbage. (Although
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above).
But, let me tell you, when I came upon the following headline, I new
I found a winner…
“Learn How To Quickly Build At Least $40,000
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-Without Making Biweekly Mortgage Payments-Or Changing Your Current Mortgage.
Now, the reason I knew it was a winner was because of the name behind
the headline. Craig Romero. Many consider Craig to be one
of the true geniuses in our field. I have a lot of respect for
him, and I
urge you to drop what you are doing right now and click the link below... |
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