Mortgage Loan Types: ARM

Debt Consolidation

Mortgage Loan Types: ARM

19th Spetember 2007

Buying a home is the ultimate American dream. But in pursuit of your dream shouldn't you know the facts and what you're getting yourself into? Mortgage refinance is one way of consolidating debts and I wrote a post that I titled " Refinancing Explained " and looked at mostly refinancing your mortgage for debt consolidation purposes. This is the first in a series of posts in which I will look at each type of loan available to you should you consider refinancing your mortgage. It will also helps you if you are first time buyer to know what options you have.

Financial Intelligence In this article I'm talking to you about the ARM or Adjustable Rate Mortgage option. The interest rate on an adjustablel rate mortgage is linked to an economic index. This means the interest rate as well as your repayments are adjusted up or down as the index changes. Usually what is known as the prime interest rate adjusts up or down so will the interest rate on your mortgage if you are using the ARM option. The prime interest rate is the interest rate charged by banks on loans they lend to their clients and amongst the major banks the rate is almost always the same. So what are the benefits of obtaining a home loan on an adjustable rate mortgage?

Benefits Of ARM

The initial interest rate on ARM loans is lower than on fixed-rate loans and that means lower monthly repayments for you
The other obvious benefit from lower repayments is the savings that you make of literally thousands of dollars if the interest rate lowers even by half a percent

There are also some risks to consider when dealing with ARMs. For instance when interest rates rise you will pay more. However for this there are measures in place called interest rate caps. There are two types of interest rate caps:

Adjustment Period Caps which limit the amount your interest rate can increase from one adjustment period to the next.
Lifetime or Overall Caps limit how much the interest rate can increase over the life of the loan.

You also get payment caps which limits how much your monthly payment can increase at each adjustment. ARMs with payment caps often do not have periodic rate caps. Important to note is that not all ARMs have adjustment period caps also known as periodic caps so be sure to clarify with your consultant or banker. ARMs without a cap are not a good ideaand you should rather not take on an ARM without caps. If the lender you are dealing with does not offer caps then look for another lender, simple.

"Money speaks sense in a language all nations understand."
- Aphra Behn

Comments (9):

Nelson Says: Wow I didn't know all this thanks | 09.19.2007 |

Gina Says: Thanks for the information at least I know more about my adjustable rate home loan now than I did when I first took it out | 09.19.2007 |

Ulrich Says: This is good information thanks | 09.19.2007 |

Bibo Says: I knew that my home loan is on an adjustable rate and all and I've experienced that when rates hike so does my payment and when they drop my payments follow what I didn't know is there are caps so thanks for the tip | 09.19.2007 |

Wesley Says: Kevin I wish you had written this two weeks ago as I would have been sure to ask if my lender gives a cap or not. I'll ask and hope I got one! | 09.19.2007 |

Edna Says: These types of mortgages are being heavily abused in the industry so be careful of ARM loans be sure its what you really need | 09.19.2007 |

John Says: It's not so much that the loan type is dangerous it is a case of the lender not informing the client of the implications and what the option entails. That's why its upto the person to do their research | 09.19.2007 |

Doris Says: Before going into anything where you'll be spending money it's up to you to find out as much as you can for yourself so that you can ask the right question | 09.19.2007 |

Rob Says: This is good info thanks Kev | 09.19.2007 |

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