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. 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 15 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 15 Year ARM is one of the more used ARM options,
simply because of the attractive monthly payment, and the length
of time the homeowner has to build more equity in an affordable
payment.
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 15 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, and your
income level is expected to increase over the next 10 years, or
your expenses are going to drastically decrease, you would
probably benefit from the standard 15 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 15 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.
