Adjustable Rate Mortgage Loans
Adjustable Rate Mortgage Loans Are a Great Alternative - Find Out Why
Adjustable Rate Mortgage Loans (ARM) has a starting interest rate lasting for a specific period of time and then adjusts yearly after that for the duration of the loan. After the specific time period the interest rate changes. Naturally, your monthly mortgage payment will change accordingly. There is usually a limit set on the maximum amount of the monthly mortgage payment.
Pros and Cons of ARM loans
- In the beginning, interest rates are usually lower than for a fixed rate loan, meaning your monthly payment will be lower. An ARM might be a good loan if you’re not planning to stay in your home for a long time. The reason being that you would sell the home before the interest rate – and your monthly payment – adjusts upward.
- If you think your income might rise at some later date, you might be fine with saving money on your lower payments now, and content with making higher payments later, when making more money.
- Generally speaking, ARMs are considered more risky than fixed loans because interest rates will almost certainly increase after the fixed rate period expires.
What Happens When the ARM Adjusts?
- The ARM interest rate adjusts after the fixed-rate time period has expired, depending on the index / margin the rate is linked to. You can follow these indices regularly since they are published on a regular basis and they are available to the general public. When the rate adjusts you will typically be looking at an increase in the rate, meaning your monthly mortgage payment will increase. You should have been preparing for this increase and should not be surprised when the monthly mortgage payment suddenly jumps up.
- Your monthly payment will usually increase each year once the fixed period expires.
Adjustable Rate Mortgage Loans have strong advantages and disadvantages. Find out if it’s the right loan for your situation.