Adjustable Rate Mortgage?

Adjustable Rate Mortgage? What is it?
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Should you get an adjustable rate mortgage?

It depends. When buying a home, there are plenty of mortgage options — adjustable rate mortgages, fixed rate mortgage, interest only mortgage, and more. Today, however, we’ll focus on the Adjustable Rate Mortgage (ARM).

What is an adjustable rate mortgage?

An ARM is a mortgage where the interest rates can change. The rates fluctuate depending on what is happening in the greater economic landscape — usually ARMs allow for an annual interest rate change. This change is determined by the Treasury Bill Index.

“Okay, that kind of make sense, but what are the benefits of an Adjustable Rate Mortgage?

In general, Adjustable Rate Mortgages (ARM) can allow for lower rates in the short term–which means lower payments. This is especially good if you are planning to sell or payoff your loan within the initial term. You can generally qualify based on the initial rate which is usually lower than a fixed mortgage, so sometimes you can qualify for more money.

“This sounds amazing! Sign Me Up” (CONS)

Hold on, it is important that understand both sides of story. Let us explain.

The are pros and cons to everything. For Adjustable Rate Mortgages (ARM), the negatives are as follows. When the initial term is up the rate goes to market: usually a margin of something like 2.25% + LIBOR (right now that isn’t bad at all because its something like 2.92%). Yet there is a lot of uncertainty and your rate can go up usually to a cap of 7% or 8% (5% plus the margin or 5% over the initial rate, though this depends on the specifics).

To summarize, with an ARM it is more than likely that you’ll be paying a different rate every year. While this can be a great thing, it also means that your rate can balloon up significantly in one year.

What should I do next?

Our blog is here simply to inform you, not to give financial advice. However, if you’re a Veteran or active U.S. Military man or woman–please contact us using the form on our front page, and we’ll get back to you as soon as possible. We may be able to help you not only simply your mortgage process, but you probably qualify for FREE Gift Funds that can eliminate closing costs!

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