Adjustable Rate Mortgages

What are Adjustable Rate Mortgages? - On the average, most home buyers get a new mortgage once every seven years. If you are buying a starter home or you tend to transfer jobs frequently over the next 5 to 10 years, you may want to consider an Adjustable Rate Mortgage. Most people do not stay in their homes for 30 years. The national average is about seven years. Even if you're not sure how long you will own your home, if you don't think you'll be there 30 years you probably don't need a 30-year fixed rate mortgage. Mortgage loans are not transferable so you'll need to get another mortgage when you move.

The Good News about Adjustable Rate Mortgages - Adjustable Rate Mortgage loan rates tend to be about 1 percentage point lower than the 30 year fixed rate loans. This can add up to a tremendous amount of savings if you stay in your home for the seven year national average. Instead of paying the same high rate for 30 years, you pay a lower rate for a mortgage that has a fixed rate for a shorter time such as five or seven years. Ideally, you should try to fix your rate for the length of time you will actually live in your house or plan to keep your mortgage. If you pay extra for a 30-year fixed term when you don't need a term that long, the extra interest you pay every month is wasted.

The Risks of an Adjustable Rate Mortgage - Saving all of this interest is certainly a good thing, but there is also a down side that must be considered. ARMs offer lower initial rates by sharing the future risk of higher rates between borrower and lender. This means that payments and interest rates can increase after the initial term of the loan. If you have a five year adjustable rate mortgage and end up staying in your home for eight years, your payment can increase after the fifth year of the loan. Consequently, homebuyers considering this kind of mortgage need to have the income to keep up with all possible rate and/or payment changes. You can always refinance before the fifth year lapses, but rates may be higher which would increase your payments as well. ARMs should be considered under certain conditions, such as rising income expectations, high interest rates, and short-term homeownership.

If my payments can go up, why should I consider an ARM? - The initial interest rate for an ARM is lower than that of a fixed rate mortgage, where the interest rate remains the same during the life of the loan. A lower rate means lower payments, which might help you qualify for a larger loan and also lower the amount you pay in interest during the term of the ARM.

So, what should I do? - The important thing to consider is how long you plan to own the house. The possibility of rate increases isn't as much of a risk factor if you plan to sell the home within a few years. Keep in mind that lenders are required to give you written information to help you compare and select a mortgage. Don't hesitate to ask as many questions as it takes to help you understand every aspect of ARMs and other home loans that are offered to you so you can make the best decision.
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