Benefits To An Adjustable Rate Mortgage | Mortgage

With today's home loan crisis, many clients are afraid of the adjustable rate mortgages. These types of loan programs, also known as ARM loans, have received bad publicity in the media. With all the terrible news reported about ARM loans, several homeowners have decided to only apply for a fixed rate mortgage loan.

by DavidGWhite

With today's mortgage crisis, many clients are scared of the adjustable rate mortgages. These types of loan programs, also known as ARM mortgages, have received negative publicity in the media. With all the bad news reported about ARM loans, many people have decided to only apply for a fixed rate loan.

But the adjustable rate mortgage program is a good mortgage loan program. Knowing how the program works and why you would want to think about the loan program is crucial when looking at all your loan options. The ARM loan could save you money.

Knowing How An Adjustable Rate Mortgage Works

First off, you need to know how the adjustable rate mortgage program works. For starters, most ARM loan programs have an initial period in which the rate is fixed. These time periods are usually between 3-7 years. At this time, most ARM programs offer fixed rates for the first 3, 5, and 7 years. During this time, the interest rate of the mortgage loan cannot change.

What Makes Up The New Loan Interest Rate

After the initial fixed rate period is over, the home loan rate can change. The new home mortgage loan interest rate is based on the index plus the margin. The interest rate index is the specific fund/security that your interest rate on an adjustable rate loan is tied to. Margin is the amount a lender adds to the index on an Adjustable Rate Mortgage (ARM) as profit to establish the adjusted interest rate.

Once the loan adjust, the new rate is based on the current index plus the margin set by the lender at time of closing. The rate can adjust every 6 or 12 months, depending on the terms of the mortgage note. Most ARM mortgages have caps on how much the interest rate can change and what the highest rate can be charged.

The Reason To Consider An Adjustable Rate Mortgage

The reason behind the ARM loan is to have the loan only during the fixed rate period. This type of loan is designed for consumers who are only going to keep the mortgage for a short period of time. If you are only planning on staying at the home for 5 years, then an ARM loan will save you more money compared to a fixed rate home loan. Many ARM loan programs offer rates starting lower than a fixed rate mortgage loan. The savings per month on the monthly payment is a major benefit to the adjustable rate mortgage.

Keep in mind that this type of loan program is not designed to be kept for the entire term of the loan. Obviously, some people will keep an ARM loan beyond the initial fixed rate period and if you do so, you need to be able to budget for a possible payment increase.

Understanding The Risk Involved

What got several people in trouble with the ARM loans is that several consumers were going with the ARM loan as the only way to qualify for the mortgage. Once the mortgage reached the adjustment period, many consumers could not make the new payment. Make sure that when you look at the ARM loan program, that you can afford the highest possible payment. Many lenders now have underwriting guidelines set in place that require the lender to qualify a person based on the highest possible payment.

Again, the main reason to do an ARM loan is that you are only planning on staying or keeping this loan for a short amount of time. If you want to keep the loan for a longer period of time, then a fixed rate loan is your best option.

Talk to your loan advisor today to see which mortgage program is best for you.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

David White is a Senior Mortgage Specialist who specializes in Home Mortgage Loans. David has over 12 years experience in the mortgage industry and understands Dallas Home Loans. David helps his clients get the best possible home loan.