Adjustable Rate Mortgages
T J Madigan
An adjustable rate mortgage, ARM, is a mortgage that has a varying
interest rate on the note. The interest rate on the mortgage
periodically adjusts based on an index. Because of the varying interest
rate, borrowers may notice their payments changing over time.
Adjustable rate mortgages are sometimes confused with graduated payment
mortgages. With a graduated payment mortgage the interest rate remains
fixed while the payment amounts change.
With adjustable rate mortgages much of the interest rate risk is
transferred from the lender to the borrower. Borrowers benefit when
interest rates on the mortgage fall. On the other hand, borrowers lose
out when interest rates rise. Usually the loans are available when
fixed rate mortgages are more difficult to obtain.
Key Terminology
Index - the guide used by lenders to measure changes in the interest.
Each adjustable rate mortgage is linked to an index.
Margin - the part of the interest rate from which the lenders profits.
The margin plus the index rate is the total interest rate. While the
index will change throughout the duration of the adjustable rate
mortgage, the margin will not.
Adjustment period - the period between interest rate adjustments,
usually denoted in the format of 1-1. The first number is the initial
period of the loan for which the interest rate will remain the same.
The second number is the adjustment period. It shows denotes the
frequency at which the interest rate can be adjusted.
Loan Choosing Tips
The index is one of the most important considerations in choosing an
adjustable rate mortgage. Even though you don't have control over the
specific index that is used by a particular lender, you can choose a
loan and lender according to the index that will apply to the
particular loan in which you are interested.
A lender you are considering can give you an indication of the
performance of the loan in the past. The ideal loan is one that has an
index that has historically remained stable. As you consider loans and
lenders, make sure you also consider the margin rate that the lender
offers.
Many borrowers wonder about the benefits of an adjustable rate mortgage
since the payments can increase over time. In most cases, the benefit
of an adjustable rate mortgage comes into play when the interest rate
of the ARM is lower than the fixed rate mortgage. The possibility of a
payment increase is sometimes inconsequential. This is true if you do
not plan to occupy the house for an extended period or if you expect
your income to increase over the life of the loan.
Avoid Negative Amortization
Negative amortization is a key watch-out when you are choosing an
adjustable rate mortgage. This can occur when a particular loan as a
cap on payments that keeps them from covering the amount of interest on
the mortgage. As a result, unpaid interest is added to the loan,
causing the amount of the loan to increase, even though you are making
payments.
You can start out with a positive amortization on your adjustable rate
mortgage but end up with a negative one due to interest rate increases.
The best way to avoid negative amortization is to avoid adjustable rate
mortgages that have a payment cap.
T J Madigan has been established in online business since 1998 and is
director of a number of successful online projects one of which is
http://www.home-sale.com.au -
FREE For Sale By Owner Real Estate
Listings.
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