Adjustable Rate Mortgage Loan- the Good, the Bad, the Shocking!!!

Leading Expert Advice…

What does an Adjustable Rate Mortgage Loan really mean to the customer?

Adjustable Rate Mortgage Loan are long term mortgage loans much like a 30 year fixed, but with variable interest rates. This simply means that they have a schedule of principal and interest payments just like a fixed mortgage, but the interest rate may be adjusted regularly during the term of the loan. This causes the monthly payments to move up and down as the rate is adjusted.

Adjustable Rate Mortgage Loan (ARM) can be a highly effective financing alternative for first and second mortgages, because of the effectiveness of many ARM’s, most home equity loans are structured as adjustable rate mortgages (ARM‘s). Depending on the contract interest rate, discount points, loan to value ratio, and maturity, ARMs can have their own unique set of terms:

- Adjustment Interval: Most ARM’s are adjusted at regular intervals outlined in the mortgage contract. In between these intervals, the interest rate on the loan is consistent. The less time between the interval, the more sensitive the loan is to changing interest rates. Most first ARMs are adjusted every year.

- Initial Interest Rate: All ARMs have an interest rate that is fixed, just like a 30 year fixed mortgage, until the first adjustment date. Sometimes this rate is set low to attract borrowers, called a teaser rate. Therefore, the initial interest rate does not indicate the long term cost of the loan. This should be a concern for borrowers who are looking to keep their loan for a period of 5 years or more.

- Convertibility: Some ARM’s provide the borrower with the option to convert to a fixed rate loan during the loan term. Because your payments almost always rise later on, some detractors call it a contract with the devil. Nonetheless, an ARM in some markets can cut your initial payments by as much as a third. That can mean the difference between being able to purchase and being left out in the cold.

The best way to understand an ARM is to compare it to a fixed rate mortgage. With a fixed-rate mortgage you always know where you stand. Your interest rate and your monthly payment remain the same for the life of the loan whether it is for 5 years or 30 years.

With an ARM, it’s a bit different. Your interest rate fluctuates, it can move up or down depending on market conditions. Your monthly payment, which reflects the interest rate, like wise can vary up or down over the life of the loan.

There are some borrowers who find the ARM to be the perfect loan for their particular situation, while others have lost their homes due to a misuse of their ARM loan, or simply because they were not informed by their Loan Officer, how to properly use their particular ARM loan.

Many have referred to ARM’s as bridge loans, because some were designed to help borrowers get back on their feet financially. From that position, the borrower was to refinance out of the ARM into a fixed rate mortgage.