Is an Adjustable Rate Mortgage Right for You?
A Home Buying Article Contributed by Elizabeth Fox-Wise
What is an Adjustable Rate Mortgage
As it's name implies, an adjustable rate mortgage, often called an ARM, is a mortgage that does not have an fixed income rate for the life of the mortgage. The interest rate for an Adjustable rate mortgage will come up for review and set inv by the mortgage lender each year and may change based on several conditions. This means that the required loan payment amount may also change.
An adjustable rate mortgage may offer a lower starting interest rate that a fixed mortgage. For many home buyers, the lower mortgage interest rate of an ARM increases their home buying power. However, unlike a fixed interest rate mortgage, there is always the risk that your interest rate and mortgage payment will increase, so your financial situation would have to be strong enough to absorb the increase.
Common Adjustable Rate Mortgage Options
An adjustable rate mortgage is available with different terms and the mortgage applicant should understand the choices and which one is best for him.
A 10/1 Year Adjustable Rate Mortgage actually operates like a fixed rate mortgage for the first ten years. The interest rate and the monthly payments remain the same for 10 years. Beginning with the 11th year, the mortgage interest rate gets reviewed and adjusted annually.
A 7/1 Year Adjustable Rate Mortgage is the same only the mortgage rate is fixed for 7 years and then gets reviewed annually beginning with the 8th year.
5/5 and 5/1 Adjustable Rate Mortgages are both fixed for the first 5 years. Starting with the 6th year, the 5/5 gets a mortgage rate review and adjustment every 5 years and the 5/1 annually.
3/3 and 3/1 Adjustable Rate Mortgages are both fixed rates for three years. Starting with the 4th year, the 3/3 mortgage rate gets reviewed and adjusted every 3 years and the 3/1 annually.
A 1 Year Adjustable Rate Mortgage has no fixed interest rate period, the mortgage rate gets reviewed and adjusted annually.
An Adjustable Rate Mortgage is a Good Choice for the Homeowner Who is Comfortable with Change
Some mortgage seekers fear an adjustable rate mortgage because they do not know what their rate will be in the future and they do not the effect that it will have on their monthly payments. These people are much more comfortable with a fixed rate mortgage, even if the interest rate is a little higher, because they have the security of knowing how much their mortgage payment will be.
Other home buyers are more comfortable with the fact that their mortgage rate could fluctuate during the life of the loan and they feel it is worth getting the lower rate by taking an adjustable rate mortgage.
Mortgage applicants who are buying a home that they don't intend to keep for many years are also often attracted to an adjustable rate mortgage. The lower rate of the ARM suits them well and they are less concerned with the long term rate fluctuation possibilities.
An adjustable rate mortgage is usually a good choice if you are buying a home at a time when mortgage rates are high. Rather than locking in to a high fixed mortgage rate, an ARM affords the opportunity for rate adjustment when the rates come back down, as they always do.
