The interest rate as well as monthly payment of most Adjustable-Rate Mortgages change every year, every three years, and so forth. The period between one rate change and the next change is called the “adjustment period”. Therefore, a loan with an adjustment period of One (1) Year is called a 1-Year ARM, and the rate can change once every year.
A 1/1 ARM is perfect for the consumer who desires to have low monthly payments for the first year of their mortgage. After the first year, mortgage rates will adjust annually with the market for the rest of the loan term. This option may also be good for consumers if they plan on selling their home after a short time. As with any Adjustable-Rate Mortgage plan, the initial interest rate will be lower than a fixed-rate mortgage plan. Consumers should keep in mind though that after that first year of lower payments, their payments can change, sometimes significantly. It is of utmost importance that consumers are able to pay their monthly payments accordingly to avoid potential foreclosure. Then, there is also the possibility to refinance for a different adjustable-rate mortgage or even a fixed-rate mortgage AFTER the first year of the 1/1 ARM.
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Are There Special Kinds of Down Payment Requirements for a 1/1 ARM?
Generally, the majority of lenders expect a down payment of 5-10% of the purchase value/price of the home.
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Potential Pitfalls & Dangers of Adjustable Rate Mortgages
While an ARM may seem like a great idea at first when a consumer is shopping for a mortgage or refinance because the initial interest rates on ARMs are always lower than on fixed rate loans, there are other considerations. When interest rates were dropping, it looked like a good option even in the long term BUT today’s times are changing at this moment and the amount a consumer saves in the first few years could very easily be depleted when rates go up. As further proof of rising rates, just look at the growing number of foreclosures. Consumers should also investigate national foreclosure statistics to see for themselves how this trend continues to gain momentum well into 2006. Worse yet, consumers may not actually see the worst of the rate hikes for at least another year. A great many ARMs are tied to the 12 MTA which is the Twelve (12) Month Treasury Average. This rate rises and falls slower than rates based on other indexes such as LIBOR.
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