Adjustable-Rate Mortgages (ARMs)

An Adjustable-Rate Mortgage simply means that the interest rate changes during the life of the loan, according to terms specified in advance. With Adjustable-Rate Mortgages consumers can expect the initial interest rate to usually be lower than with a fixed-rate loan and the monthly payment would also be lower. The initial interest rate may be adjusted, either up or down, at predetermined times, hence the monthly payment will then either increase or decrease accordingly. Consumers should keep in mind that most ARMs programs offer “rate cap” protection. The rate cap protection limits the amount the rate can be increased, both every year and over the life of the loan. All ARMs are amortized over 30 years. There are many advantages to an ARM program. Most often, an ARM is the wisest choice for consumers who have future plans to relocate or for those who may be buying their first home with plans to stay in the home only for three to five years. Future relocation plans may be due to a job/company change or military. There are also disadvantages to ARMs and consumers should keep in mind that if they are on a fixed income, an ARM, particularly a short-term ARM, may not be the wisest choice. ARMs are usually best for consumers who are not planning on staying with a property for an extended period. Bear in mind that generally most people either refinance or move within seven years.

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About Adjustable Rate Mortgages

Are There Additional Pitfalls & Dangers of ARMs?
Riskier than Fixed Rate Mortgages, one would pay interest rates as the market fluctuates instead of a fixed interest rate. This option is fine as long as interest rates drop during the mortgage, but should the rates rise, you could eventually pay more that you would with a fixed rate. One should always remember the ARM risk factor as your second year could have quite higher interest rates compared to the first year, IF the market goes upward. An ARM could end up being a benefit if you can tailor it to work towards your specific needs. 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. 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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