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Adjustable Rate Mortgage Revealed

Author : Ask Bill

Adjustable rate mortgage, or ARM, may be defined as a loan that might offer a fixed rate for a period of time, most commonly 3, 5, 7, or 10 years. After the introductory period ends the interest rate for the loan would be adjusted up or down depending upon the current rate of the loan's index plus the loan's set margin. The benefit might be that the initial rate might generally be lower than a comparable fixed rate loan . It may be noted that this might not always be the case. ARMs might be considered in some typical situations. One might plan to only own their home for a few years as one relocates often because of work. One might have a growing family that plans to buy a larger home in a few years. ARM may also be considered by an investor who buys properties, renovates them, and sells them a couple of years later.
Adjustable rate mortgage might carry some risk. If one would continue to hold the mortgage past the initial fixed rate period it might adjust upwards. It would thus be important to look at the adjustment frequency and the adjustment cap structure. The adjustment frequency would be defined as to how often the ARM rate adjusts. The cap structure would dictate the amount by which the interest rate can increase - a common example would be 5/2/5, meaning the first adjustment might be as high as 5%, subsequent adjustments might be as high as 2%, and the total adjustment over the life of the loan might be as high as 5%.
ARM adjustable rate mortgage eed not necessarily offer a fixed rate for a period of time. The mortgage may be availed at adjustable rate from day one. In other words, there may be no guarantee that the rate at which the loan was availed would be fixed for any length of time. It would also mean that as the rates in the open market fluctuate, so will the rate of interest on the mortgage. Some financial institutions might offer to change rates on a monthly, semi-annual or annual basis. It might hence be prudent to first check on these rate change factors while deciding to avail an adjustable rate mortgage on the home.
The adjustable rate interest on the loan would be periodically adjusted based on an index.
This might be done to guarantee a loyal and steady margin for the lender, whose own expense of funding would ordinarily be allied to an index. It was found that ARMs might often be sold to people who might not be experienced in dealing with them. These individuals may not pay back the loans within three to seven years, and might be subjected to fluctuating interest rates, which may often rise substantially. There might be a number of things consumers might do to protect themselves from rising interest rates. A maximum interest rate cap might be set which would only allow interest rates to rise at a specific amount each year, or the interest rate might be locked in for a specific period of time with the lender before availing the loan. This might give the homeowner time to increase their income so that they might make larger payments on the principal. Another disadvantage of adjustable rate mortgages might be that the fluctuating payments might make it difficult for a homeowner to create a monthly budget. The only possible advantage of this type of loan might be that the payments might be lower for the first few years and thus may help a home owner save some money.

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Tags:   adjustable rate mortgage, arm adjustable rate mortgage, adjustable rate

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Submitted : 2010-10-13    Word Count : 607    Times Viewed: 294