Author Login | Popular Articles | RSS Feeds | Sitemap

Home | Finance | Mortgage-refinance


Why Choose an Adjustable Rate Mortgage?

By: rateempire

Adjustable rate mortgages (ARMs) are appealing to many homebuyers, but what are the risks?

An adjustable rate mortgage is one in which the rate changes based on the market interest rates. The rate will adjust on a specific schedule, say once a year, after an initial fixed period. Fixed periods range from six months to five years. Some may have even longer fixed periods.

The risk in an ARM comes from having a payment that can change significantly. When you have a fixed rate mortgage, you know that your payment will be the same now, ten years and twenty years later. The payment doesn't change because the interest rate is fixed.

When you choose an adjustable rate mortgage, you accept the risk of a rising payment in return for a lower initial interest rate. This rate is usually much lower than the market rate for a 30-year fixed rate mortgage. The more risk you accept, the lower your initial interest rate. The more adjustments the loan will go through, the more risk. The traditional thinking is that even after a loan adjustment, the rates will be lower than those offered to new borrowers for 30-year fixed mortgages. However, it does happen where this gap closes, especially in periods of rising interest rates.

The best time to get an ARM is when interest rates are on the decline. Despite the risk, an ARM can be beneficial to certain borrowers. While most advisors will tell you that a fixed-mortgage is the way to go in every situation, there are times when you should consider an adjustable rate.

1. The borrower needs extra cash for a while.

A lower initial fixed rate gives you more money in your pocket early in your loan term. For example, a one-year ARM with a 30-year term and a rate which adjusts once a year on the anniversary of the loan date comes with zero points and an initial rate of 5.625%. Let's compare that to a 30-year fixed rate mortgage with no points and a fixed rate of 7.625%.

If you take out a $240,000 mortgage, the 30-year fixed rate payment would be $1,698.70 each month. The one-year ARM would have a monthly payment of $1,381.58. That's a difference of $317 a month.

You could use that extra $317 to pay off your credit cards, make improvements to the home or save for retirement. But you want to make sure that you will maintain a lifestyle that can afford for your payment to increase. You don't want to find that you cannot afford a higher mortgage payment when the rate adjusts upwards.

2. Buy more home.

Because of the lower initial interest rate, you can qualify for a larger mortgage amount and a more expensive home. Many homebuyers secure a one-year ARM with the purpose of refinancing them later. The low rate allows a more costly home, but a low mortgage payment. But remember that refinancing comes with closing costs. Do the math to see if you are really saving any money.

3. It all depends on the future.

If you plan to move or upgrade in the next few years, an ARM is a wise decision. You can benefit from a lower rate mortgage and simply sell the home and buy another before the rate adjusts. For example, if you plan to move in three years, why not go in for a five-year adjustable mortgage. You get a lower rate that won't adjust while you own the home, as long as you sell during the initial rate period.

Make sure that the loan comes with no prepayment penalties. Make sure that you do some math. If interest rates go up drastically in those three years, when you buy a new home, you will be facing the higher interest rates. This could mean that you are unable to really upgrade to a larger or more expensive home.

Adjustable-rate mortgages are basically all about weighing the risk. You are getting a lower interest rate and payment for taking the risk of having to pay a lot more in the future. Some homeowners are experiencing this right now as foreclosures are on the rise. Many homeowners failed to calculate how much their mortgages could adjust to. Some have seen large increases that they are unable to afford. Do all of the math and always prepare for the worst case scenario when considering an adjustable rate mortgage.

Article Source: http://www.articlesnatch.com

About the Author:
Rate Empire, an internet consumer banking and mortgage marketplace, is a destination site of personal finance, investing, taxes and mortgage rates. Rate Empire also operates a financial portal #1 Best Mortgage Rate and #1 Home Improvement Services

Tags: , ,
| Print | Ezine Ready | |

Recent Mortgage-Refinance Articles

  • How to define your Priorities in Loan Modification By: The Loan Modification Department - The terms you will get depend on what makes the most financial sense to your lender. Your loan modification attorney should run you through your options and help you set realistic goals. Below are some of the ways your loan modification can be changed, and how they can work for you. The ultimate goal with the whole home loan modification process is to save your home by adjusting your mortgage to a payment that you can afford for the long term. 1.
  • How To Refinance By: ratetake - Most important part of taking advantage of current mortgage rates is to refinance your mortgage or loan. There are very easy steps on how to refinance your loan. Currently 30 year fixed mortgage rates reached all time low records of 5.08% and many homeowners want to take advantage of these rates. First step is to get a multiple mortgage quotes to find the right lender. There are many lenders that can help but only few can offer a good rates.
  • Apply Equity Mortgage Release to Keep a Comfortable Dotage Stage By: raffick4 marday4 - Mortgage Equity Release or Home Reversion Plan: Decide Which is Ideal Calculating your basic monthly needs and other needs for living comfortably while you are almost in your retirement age provides you a bleak and worrisome future. Including your possible retirement funds does not seem to answer even half of your expenses. What do you think you should do when you are faced with such an important decision in your life? Mortgage equity release or Home reversion Plan, which do you think is Ideal.
  • Benefits of a Second Mortgage Loan By: James Sapp - With the right bad credit mortgage loan, you will finally be able to enjoy lower interest rates on your high interest bills. Bad credit second mortgage loans are secured against the same assets as the first. It is based on the amount of equity or interest or ownership you have in that property, therefore it is based on the difference between the current value of the property and the amount you owe on it.
  • Florida Mortgage Broker By: Isabelle Lucas - These are times of recession and it is expected that real estate will bear a major brunt of it. Having said this, few government initiatives at the right time can turn things under different radar. Well! The sub prime crisis is fresh in our minds but a more cautious spread from the mortgage companies can always be helpful in a fair lender-borrower relationship. Florida is doing very well in terms of its real estate, and it is looking to buck the recession trend.
  • Consider The Many Factors Involved For Securing The Best Possible Refinance Mortgage Loan|Securing The Best Possible Refinance Morgage Loan Requires The Consideration Of Many Factors|Is The Possibilit By: Marcia Freeman - There are thousands of individuals every year who find they need to consider a refinance mortgage loan.When people are able to achieve a much better credit rating and receive more income, there are times that they will be able to benefit from receiving lower interest rates and a much lower mortgage payment on their home. Then there are others who may find the need to refinance the loan on their home because they simply ran into financial difficulties due to unexpected expenses or loss of income.
  • Avoiding Losing Your Home Through Debt By: Nicholas Hunt - The process of not losing your home because of debt, really should begin when the homeowner first purchases a home.
  • How To Clear Your Mortgage Arrears By: Nicholas Hunt - Amid the current economic crisis, many homeowners are finding it increasingly difficult to meet their monthly expenses. Jobless rates are rising, and lenders are facing difficulties of their own with the tightening credit markets. The faltering financial conditions we are experiencing have caused countless borrowers to fall behind on their mortgage payments. If you are in default on your home loan and confronting the possibility of losing your property, there are steps you can take to clear your mortgage arrears before it is too late.
  • Home Mortgage Re Financing with Bad Credit By: qxmax - Many years ago, it would have been extremely difficult for those with bad credit to obtain a mortgage loan in the first place. However, today there are so many loan options available and so many ways for lenders to protect themselves that those with bad credit can not only find a suitable mortgage but can also find appealing re-financing options as well.
  • Success your business with commercial mortgage broker By: Sharon Samraj - What is the best way for anyone to achieve success as a commercial mortgage broker. There is no easy route or magic formula to become successful in commercial mortgage business. The right thing for you to do to succeed is to conceive and focus on a few innovative programs. Work on these programs and target all your marketing efforts to the borrowers to whom these programs would appeal.

Comments

Search Ebay

Still can't find what you are looking for? Search for it!


Add to Google
ArticleSnatch Authors:
Member Login Sign Up Submit Articles FAQ Submission Guidelines Top Authors
For Publishers:
Most Popular Articles Ezine Notifications Article RSS Feeds Terms of Service
For Everyone:
Blog About Us Link to Us Contact Us New Stuff Link Directory Privacy Policy Sitemap Resources
Our Sites:
Free Magazines Book Your Hotel Stay Free MySpace Tools Massive Video Collection Broadband Speed Test
Click here to submit your free, permanent ads to TheFreeAdForum.com!

Submit Your link to the Open Link Directory Project

Copyright 2005-2008 MJE Sales, LLC. All Rights Reserved.
Proud member of the ArticleCkr Search Network Search Network!
ArticleSnatch.com is free for both publishers and authors to use and is supported entirely from advertising revenue.
Use of our service is protected by our Privacy Policy and Terms of Service.