How An Adjustable Rate Mortgage Could Save You Money

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

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

Understanding How An Adjustable Rate Mortgage Works

First, you need to understand how the adjustable rate mortgage program works. For starters, most ARM loan programs have an initial time period that 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 Mortgage Interest Rate

After the initial fixed rate period is over, the ARM 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 mortgage company adds to the index on an Adjustable Rate Mortgage (ARM) as profit to establish the adjusted interest rate.

Once the loan can adjust, the new interest 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 what the mortgage note states. 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 idea behind the ARM loan is to have the loan only during the fixed rate period. This type of loan is designed for people who are only going to keep the mortgage for a short period of time. If you are only planning on staying at the property for 5 years, then an ARM loan will save you a lot of 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 mortgage program is not designed to be kept for the entire term of the mortgage. Obviously, some homeowners 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 consumers in trouble with the ARM loans is that many homeowners were going with the ARM loan as the only way to qualify for the loan. Once the loan reached the adjustment period, many people 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 mortgage companies now have guidelines set in place that require the lender to approve a homeowner 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 mortgage 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 home loan professional today to see which mortgage program is best for you.