The Benefits of An Adjustable Rate Mortgage
Unlike a fixed rate mortgage an adjustable rate home loan (also known as an ARM mortgage) gives you variable interest rates. So, the repayments that you make on this kind of mortgage will not remain the same and could go up or down depending on the actual terms of your deal.
In most cases these mortgages come with rates that are adjusted by the mortgage lender in certain market conditions. Rates will usually and to a certain extent track changes in centralized financial industry interest rates such as the LIBOR (London Interbank Offered Rate) and COFI (Cost of Funds Index) indexes. These mortgages are popular with consumers who feel that interest rates may go down rather than up.
The adjustable rate mortgage loan does come with a downside, however. If the rates to which the loan is linked start to rise then the borrower's monthly repayment could well rise too. This can see a lot of borrowers left unable to afford their mortgage repayments and in risk of losing their homes.
Not all adjustable rate mortgage loans will change their rates in the same way. Some, for example, will match their linked index like for like, some will add a margin percentage on top of the index and some make rate changes on the adjustments to be made rather than the rate given with the initial mortgage.
Many mortgages of this kind come with an initial 'honeymoon' period (often called an initial discount) where the interest rates that are charged are fixed or given at a rate below the linked index. The rates here can be significantly lower than market rates as an incentive for borrowers to apply for a loan and, when they do rise, the increase in payments can, as already mentioned, come as something of a shock.
Some mortgage products here also offer a useful benefit known as a 'cap'. This benefit sets a maximum limit on changes to the interest rates charged. Borrowers should check the terms of any caps offered carefully before taking them up. Sometimes the difference between the cap and the standard ARM payment is not enough to repay the mortgage itself which could lead to an increase rather than a decrease in your mortgage balance over time. This is often referred to as negative amortization.
In certain cases you may be able to take out an ARM mortgage that also works like a conversion mortgage. This kind of deal will allow you to change your deal to a fixed interest one at certain times and for certain periods which could be useful if rates rise considerably.
It is important to think hard about whether this kind of mortgage will be the best option for you. When interest rates are low or start to fall then this could be the best deal to have. However, if interest rates look to rise then you could find yourself paying a lot more for your repayments than you first thought.
In most cases these mortgages come with rates that are adjusted by the mortgage lender in certain market conditions. Rates will usually and to a certain extent track changes in centralized financial industry interest rates such as the LIBOR (London Interbank Offered Rate) and COFI (Cost of Funds Index) indexes. These mortgages are popular with consumers who feel that interest rates may go down rather than up.
The adjustable rate mortgage loan does come with a downside, however. If the rates to which the loan is linked start to rise then the borrower's monthly repayment could well rise too. This can see a lot of borrowers left unable to afford their mortgage repayments and in risk of losing their homes.
Not all adjustable rate mortgage loans will change their rates in the same way. Some, for example, will match their linked index like for like, some will add a margin percentage on top of the index and some make rate changes on the adjustments to be made rather than the rate given with the initial mortgage.
Many mortgages of this kind come with an initial 'honeymoon' period (often called an initial discount) where the interest rates that are charged are fixed or given at a rate below the linked index. The rates here can be significantly lower than market rates as an incentive for borrowers to apply for a loan and, when they do rise, the increase in payments can, as already mentioned, come as something of a shock.
Some mortgage products here also offer a useful benefit known as a 'cap'. This benefit sets a maximum limit on changes to the interest rates charged. Borrowers should check the terms of any caps offered carefully before taking them up. Sometimes the difference between the cap and the standard ARM payment is not enough to repay the mortgage itself which could lead to an increase rather than a decrease in your mortgage balance over time. This is often referred to as negative amortization.
In certain cases you may be able to take out an ARM mortgage that also works like a conversion mortgage. This kind of deal will allow you to change your deal to a fixed interest one at certain times and for certain periods which could be useful if rates rise considerably.
It is important to think hard about whether this kind of mortgage will be the best option for you. When interest rates are low or start to fall then this could be the best deal to have. However, if interest rates look to rise then you could find yourself paying a lot more for your repayments than you first thought.
About the Author:
Richard Belton helps people find mortgage broker leads at his website on mortgage broker leads.
posted by Credit Counseling at
4:35 AM
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