What is an Adjustable-Rate Mortgage? Should You Consider It?

1. What is an Adjustable-Rate Mortgage? Should You Consider It? Buying a home can be an experience that rivals some of life’s biggest moments. It also means making choices and decisions that determine financial and emotional wellbeing. Making those decisions necessitates learning a little of what it’s all about and where to go when you need to learn more! A mortgage becomes not only the tool that allows ownership, but a trap that may spring if not treated with intelligence. It is wise to take small steps and be assured that there are those who do know answers. These people are waiting to be consulted. The Adjustable Rate Mortgage can be introduced in a short essay but, when making a decision as to its value for a particular situation, the professional should be consulted. The ARM gets its name from exactly what it is — a mortgage with the rate of interest adjusted periodically. Its counterpart is the Fixed-Rate Mortgage which keeps the same interest rate for the entire length of the loan. The interest rate is made up of two parts. The index rate of averages in the financial world and the margin which is the extra that the loan company adds. These two factors make up the interest rate on the mortgage, both fixed and adjustable. What happens with the ARM is that a lower interest is offered at the beginning of the mortgage, and after a number of years, it is adjusted and the mortgage payment will go up to cover the new interest. For example, the 3 referred to in a 3/1 ARM means that the low beginning interest will go for 3 years. Then, a new interest will be determined. After this 3-year period, the rate will be adjusted one (1) time each year until the end of the mortgage. This change will probably bring a higher payment each year. A 5/1 ARM is one that is first adjusted on the fifth year and then once every year until the end. Another kind of ARM keeps the initial payment down by eliminating any principal payment on the amount borrowed. There is sometimes a cap put on the amount of the new payment or on the new interest, or on the amount due and, if this happens, the payments due will be put back in the initial mortgage amount due. It is necessary that an

2. increased source of income be available to pay for an increased mortgage payment through the years of this mortgage. Some ARMs may be transferred to Fixed Rate Mortgages at specific times. There is a fee for this and for early payoff. Who should take advantage of the ARM with its low numbers at the beginning? Since the interest rates are lower at the beginning, the homeowner who is planning on only a short time with the mortgage will benefit the most. Someone who is looking for additional cash at the beginning of the home ownership process but knows that he will have a definite increase in cash flow to meet the need later on will find the ARM helpful.