As you begin to traverse the actual home appraisal, the loan
amortization, your down payment, and all the dots that must be
connected in order to make the dream a reality, you suddenly
realize that you may not be able to afford a payment on the
Fixed Rate Mortgage plan. What other options are available?
Well, there's the Adjustable Rate Mortgage that is a close first
cousin to the Fixed Rate mortgage, just a little riskier when it
comes to establishing the interest rate. What products are
available with the Adjustable Rate Mortgage? What advantages
does the Adjustable Rate Mortgage option offer, and what are
they drawbacks, if any? This article examines the advantages and
disadvantages, if any, of the Adjustable Rate Mortgage and the
30 Year ARM option.
The Adjustable Rate Mortgage, or ARM, is a more affordable
option for homeowners who have a fairly tight monthly budget,
and who have a need for bigger house, lower payment. The typical
ARM customer wishes to build equity in their home; however they
need the lowest monthly payment possible, for a certain number
of years. The homeowner this program most benefits is the
individual who expects income increases to occur within a few
short years, but also has an expanding family with a need for
space. The 30 Year ARM is one of the less used ARM options,
simply because of the length of time before expiration;
generally, homeowners will seek to establish a set interest rate
before the 30 year term is over.
An ARM works in this way: when you set up your mortgage on an
ARM, the interest rate you have will only be set for a very
short period of time, normally only 6,9, or 12 months. At the
end of that period, the interest rate will be re-evaluated, and
if the rates have increased based on the prime, your interest
rate will also increase; once again, for a short, set period of
time. The benefit derived from this type of loan, during today's
economy, is that the interest rates are at an all time low. That
equates to big savings for current home buyers, and homeowners
who refinance.
The 30 Year ARM allows the mortgage loan to operate as an
adjustable rate mortgage for 15 years, automatically converting
to a fixed rate loan after that 15 year period has expired, for
another 5, 7, or 10 years.
The disadvantage to this type of loan occurs when interest rates
begin to rise. As the rate rises for the lending institution, it
also rises for you, the homeowner. The home mortgage product
market can be very confusing, and quite frustrating if you don't
take the time to fully research and understand your mortgage
options. Another great benefit to the ARM, when interest rates
are low, is that it allows you to build equity faster than with
a standard fixed rate mortgage. But if interest rates begin to
rise, quickly, your opportunity for building equity quickly, is
greatly diminished, because more of the payment is directed to
the interest on the loan. If you fall into the category of the
typical homeowner, ARMs aren't as attractive as the fixed rate
mortgage; but let's face it the typical homeowner category seems
to be shrinking. All in all, if you are buying a home in your
early thirties, your income level is expected to continually
increase over the next 15 years, and your expenses are going to
drastically decrease, you would probably benefit from the
standard 30 Year ARM that converts to a FRM. All the other
complicated options still simply do not benefit the average
homeowner today. Now, if you don't happen to be average, and you
have a financial advisor that can work with you closely, I'd
recommend that you consider all those other options, but only
with the assistance of a trained financial analyst. After all,
your home is a purchase you definitely do not want put at risk.
The 30 Year ARM is a good, solid product that allows the
homeowner to build equity, with a low interest payment each
month, while also providing the lending institution the
opportunity to reset an interest rate, if they should begin to
rise quickly. This is one of the greatest reasons banks tend to
promote the ARMs as much as they do the standard FRMs: they're
fairly safe, time-tested products.
About the author:
Tony Robinson is a Real Estate Investor, Webmaster and
International Author. Visit
http://www.ezy-mortgage.com/ for his
tips on mortgages.
