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Adjustable Rate Mortgages - Understand the Benefits Compared to a Fixed Rate Mortgage
from: Carrie ReederAdjustable 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.
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Home Mortgage Refinance Specific links
Home Mortgage Refinance News
Obama Said to Plan Assistance for Home Mortgage Refinancing - San Francisco Chronicle
 Wall Street Journal | Obama Said to Plan Assistance for Home Mortgage Refinancing San Francisco Chronicle The president also will reveal a pilot program to sell foreclosed properties in bulk to investors who maintain the homes as rentals, the official said. The pilot will be limited to homes owned by Fannie Mae, the mortgage company under government ... Obama unveils mortgage refinancing plan Obama Plans Assistance for Rentals, Mortgage Refinancing Obama Seeks Refinancing Aid to Lift Housing |
Obama Said to Plan Assistance for Home Mortgage Refinancing - Bloomberg
 Bloomberg | Obama Said to Plan Assistance for Home Mortgage Refinancing Bloomberg Enlarge image Obama Plans Assistance for Rentals, Mortgage Refinancing Obama Plans Assistance for Rentals, Mortgage Refinancing Matthew Staver/Bloomberg Champion Home Builders Inc. in Flint on Oct. 26, 2011. Play Video Play Video President Barack Obama ... Obama presses Congress on home refinancing Obama pressures Congress on mortgage refinance program Obama: Push for mortgage reform |
Mortgage Refinance Rates: 15 Year Refinance Mortgage Rates at 3.29% - MonitorBankRates.com
 MonitorBankRates.com | Mortgage Refinance Rates: 15 Year Refinance Mortgage Rates at 3.29% MonitorBankRates.com Mortgage refinance rates on 30 year conforming home loans are averaging 3.98%, unchanged from yesterday's average 30 year mortgage refinance rate. Mortgage refinance rates today on 15 year home mortgage loans are averaging 3.29%, down from yesterday's ... Security America Mortgage, Inc. Extends the Mortgage Lending Industry ... CEO, Garret Puckett, Proudly Announces the Recently Launched VA Loan Websites ... |
Editorial: Help underwater homeowners who are responsible - USA TODAY
 USA TODAY | Editorial: Help underwater homeowners who are responsible USA TODAY Almost six years into the worst housing crisis since the Great Depression, home prices continue to fall and foreclosures show little sign of abating. More than 20% of homeowners remain "underwater" on their mortgages, owing more than their homes are ... |
Should you refinance again? - MSN Money
Should you refinance again? MSN Money The study also shows that the median interest rate reduction was 1.4 percentage points, a 26% savings on mortgage interest rates, and during the first year of the newly refinanced loan the average dollar savings totaled $2700 on a $200000 home loan. Freddie Mac Good For Business, Bad For Homeowners? February 6: Market Risk - 85 Percent of US Refinancing Homeowners Maintain or ... |