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Should You Get An Adjustable Rate Mortgage?
Posted By Ron On April 21, 2011 @ 1:33 AM In Mortgages,Personal Finance | Comments Disabled
Honestly, that depends on your personal situation. Adjustable Rate Mortgages (ARMs) do have their place but they’re not the panacea many mortgage  brokers make them out to be. An ARM loan is primarily for people with a specified need for a mortgage  and who plan to sell their home before the rate term expires or adjusts.
An adjustable-rate mortgage  (ARM) has an interest rate that can change at certain specified and agreed upon points during the term of the loan. Most ARMs offer a fixed rate for a certain period of time (3, 5, 7, or even 10 years), after which the rate adjusts to match current interest rates. Some ARMs have an interest rate adjustment cap (like one percent) over which the rate cannot adjust. For example, if your ARM has a rate of 3.75 percent with a 1 percent adjustment cap, it cannot adjust to more than 4.75 percent on its first adjustment go-around.
Whenever the interest rate adjusts, the amount of your monthly payment will increase (if interest rates rise) or decrease (if interest rates fall – there isn’t much downside risk for rates to fall right now). Like fixed-rate mortgages, ARMs usually come with 15- or 30-year terms. At the end of the term, you will have paid off the original principal plus interest. The total amount of interest that you pay on the loan will vary based on:
|Lower initial costs:During an ARM’s fixed term, interest rates and monthly payments are usually lower than those of fixed-rate mortgages.||Financial risk: If rates have risen by the time your fixed term ends, your monthly payments on an ARM can increase substantially or even double.|
|Assumability: Unlike fixed-rate mortgages, many ARMs can be transferred to third parties, which can make your property attractive to buyers looking to assume a seller’s loan.||Stress: Some borrowers forgo ARMs in exchange for the peace of mind that comes with fixed-rate mortgages’ permanent interest rates and set payment amounts.|
The rate index and margin determine how the interest rate of an ARM adjusts after the fixed-rate term expires.
If you’re shopping for an ARM, always be sure you’re evaluating the fully indexed rate of a loan, not just the index rate. Also, be wary of loans with teaser rates—introductory interest rates that are usually much lower than the loan’s fully indexed rate but often last as little as one month. Ignore teaser rates entirely and focus on the rate that takes effect once the fixed-rate period of your ARM ends.
There are a few other key terms you should know as you begin to consider getting an ARM:
It’s impossible to answer one way or the other since I don’t know your personal financial situation, but if you plan to be in your home only 5-7 years and you’re confident you’ll be able to sell it when the time comes, an ARM loan may be your best choice.
But if you’re unwilling or unable to sell your home and the rate is about to adjust to a level that makes your payment difficult to make, an ARM loan may be your worst nightmare.
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