Adjustable Rate
Mortgages - Understand The Benefits Compared To A Fixed Rate Mortgage
By Carrie Reeder
Adjustable 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.
About the Author: To view Carrie
Reeder's list of most recommended mortgage lenders, visit this page: www.abcloanguide.com/lessthanperfectcredit.shtml.
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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