The Adjustable Rate Mortgage (ARM) have their pros and cons. For a long time ARMs, also known as flexible and variable rate mortgages, have been considered a good option for buyers who are looking to sell their home or refinance within 3 to 5 years. ARMs suit such an aspiring due to their low initial interest rate. If the home can be sold or refinanced before the interest rate starts fluctuating, homebuyers can be sure of a low interest rate for a defined period of time. 

Because the initial monthly payments on an ARM are considerably lower than that on a traditional fixed-rate mortgage, a buyer can qualify to purchase more home than they could if they took out a loan with a fixed-rate. When looked at myopically, this looks like an attractive option.

The chief issue of securing an ARM is the near certainty that the interest will increase over time. 

Even though homeowners know when the adjustment rates kick in, they can never be certain of how much the rate will change. The fluctuation of an ARM is dependent on financial markets. 

If the interest rate on an ARM rises enough, it’s possible that one could end up paying more per month on a variable rate loan than one would on a fixed-rate mortgage.

That being said an ARM offers some protection to the home buyer. Most ARMs limit or cap how much an interest rate may change both during the length of the loan and the predetermined adjustment period. An ARM loan contract will state how long the adjustment period will be. The length of time regarding interest changes are six months or one, three or five years. If a consumer secures a loan with a one-year period of adjustment, then the rate may be changed on a specified date only one time per year. Additionally, if you’re so inclined at a future date, a lender may allow the consumer to convert the ARM to a fixed-rate mortgage.

Before securing a ARM, borrowers must be made aware of negative amortization. Amortization is the reduction of any debt achieved through loan payments. If an ARM has a negative amortization clause it denies most of the benefits that a cap offers. Negative amortization happens when a monthly payment is capped and the interest rises to the point where a homeowner is no longer paying the full monthly interest of the loan. 

The difference between what’s paid and owed is added to the mortgage balance thus increasing the debt owed. Rapid City mortgage brokers advise steering clear of such ARMs. 

A double whammy can occur when ARM rates rise higher than the fixed-rate and negative amortization occurs. In essence, a consumer can find him or herself unable to make payments on a home that continues to accumulate debt, possibly to the point where more money is owed on the home than it is worth.

If, however, rates go down or remain the same and the consumer is able to lock in, convert to a fixed-rate, refinance or sell, then they come out ahead. Switching to a fixed-rate will raise the monthly payment considerably but you’d also be certain that the interest won’t change.

Before settling for the first ARM offer that comes your way, here are a few actions you can take to ensure that you get the best offer possible. 

Shop Around:

Don’t settle for the first offer you receive. This is the biggest financial decision of your life. Let the gravity of that sentence sink in as you continue your search for a loan that works for you. Don’t let a lender pressure or bamboozle you into a loan that doesn’t work for you. 

Make Sure You Know the Terms:

The terms of a home loan aren’t always clear-cut. Be sure to do your due diligence in researching what questions to ask when finding a home loan. You must ask questions, understand the answers thoroughly, and ask for further explanation if needed.

Understand the three number sequence that is accompanies an ARM. Such a sequence might look something like —3/1/6. In this example, you’re first given the initial cap change of 3, which is the maximum change allowed the first time the rate is adjusted. This maximum is often higher than subsequent changes. The second number represents the periodic change cap. This number, which in our example is 1, is the largest interest rate adjustment allowed during all other changes. The final figure is the life cap or the maximum adjustment that can be instigated during the term of the loan. In our example the life cap is 6, which is typically the highest amount you’ll see for a life cap on a first mortgage.

Ask Yourself “What if?”:

When it comes to a mortgage, the unpleasant questions are the ones that need to be answered first. Understand how a 3% rise in the interest rate would affect your bank account in the first adjustment period. If you secure a loan with an interest rate that can be altered every six months, could you afford a big spike in the rate? Would your ability to pay and the security of your home be jeopardized by an upward trend in mortgage rates? Look at the actual numbers.

Study Financial Trends:

ARMs are linked to the market. Study what’s taken place in the market over the past 12 months and read up on what the experts are predicting. Check the index your prospective lender uses to determine if rates will rise, fall or stay the same. Ask the loan company what index they utilize to calculate if your mortgage payment will change. Lenders should be able to provide such information as well as the margin, which is the additional amount the lender adds to the index rate. It is usually from one to three points and is constant for the length of the loan. Study the index’s past performance to determine how stable it is and how often it changes. Some indexes will be adjusted monthly.

Purchase A More Pocket Friendly Home:

You shouldn’t have to compromise on your dream home. But if an ARM gets out of hand, that dreams can quickly morph into a nightmare. But just because you’re settling now doesn’t mean that you’ll always live in the same home. Buying a less expensive home at a fixed-rate can pay dividends in the next five to ten years. By paying more than interest on a loan, the homeowner benefits in two ways.

First, because the consumer is paying principal and not just interest, they are slowly retiring the debt on the house, building equity and actually becoming the owner of the property. If the owner sells the home ten years down the road, he or she will realize a profit that can go towards the down payment for a bigger and better home.

A fixed-rate mortgage also allows you to benefit more from any appreciation in the property. If in ten years, you’ve paid $12,000 in principal on a home worth $100,000 and that same home rises in value by 3% per year, which is a negligible amount, then you would have a home that’s worth about $134,000 and a total gain of $46,000. $46,000 would be quite helpful in purchasing your new dream home!

Try to think in the long term when it comes to home ownership. It can pay off in a very short amount of time, especially if you live in an area where property and home prices continue to escalate.

Although an Adjustable Rate Mortgage may look promising at first glance, it does have its pitfalls. When purchasing a home carefully consider all of your options, do your homework and think about the future and what will be best for you and your family. When in doubt consult with one of the many agents at Affiliated Mortgage. To help kickstart your financial planning, take advantage of the company’s mortgage calculator.  

The Adjustable Rate Mortgage (ARM) have their pros and cons. For a long time ARMs, also known as flexible and variable rate mortgages, have been considered a good option for buyers who are looking to sell their home or refinance within 3 to 5 years. ARMs suit such an aspiring due to their low initial interest rate. If the home can be sold or refinanced before the interest rate starts fluctuating, homebuyers can be sure of a low interest rate for a defined period of time. 

Because the initial monthly payments on an ARM are considerably lower than that on a traditional fixed-rate mortgage, a buyer can qualify to purchase more home than they could if they took out a loan with a fixed-rate. When looked at myopically, this looks like an attractive option.

The chief issue of securing an ARM is the near certainty that the interest will increase over time. 

Even though homeowners know when the adjustment rates kick in, they can never be certain of how much the rate will change. The fluctuation of an ARM is dependent on financial markets. 

If the interest rate on an ARM rises enough, it’s possible that one could end up paying more per month on a variable rate loan than one would on a fixed-rate mortgage.

That being said an ARM offers some protection to the home buyer. Most ARMs limit or cap how much an interest rate may change both during the length of the loan and the predetermined adjustment period. An ARM loan contract will state how long the adjustment period will be. The length of time regarding interest changes are six months or one, three or five years. If a consumer secures a loan with a one-year period of adjustment, then the rate may be changed on a specified date only one time per year. Additionally, if you’re so inclined at a future date, a lender may allow the consumer to convert the ARM to a fixed-rate mortgage.

Before securing a ARM, borrowers must be made aware of negative amortization. Amortization is the reduction of any debt achieved through loan payments. If an ARM has a negative amortization clause it denies most of the benefits that a cap offers. Negative amortization happens when a monthly payment is capped and the interest rises to the point where a homeowner is no longer paying the full monthly interest of the loan. 

The difference between what’s paid and owed is added to the mortgage balance thus increasing the debt owed. Rapid City mortgage brokers advise steering clear of such ARMs. 

A double whammy can occur when ARM rates rise higher than the fixed-rate and negative amortization occurs. In essence, a consumer can find him or herself unable to make payments on a home that continues to accumulate debt, possibly to the point where more money is owed on the home than it is worth.

If, however, rates go down or remain the same and the consumer is able to lock in, convert to a fixed-rate, refinance or sell, then they come out ahead. Switching to a fixed-rate will raise the monthly payment considerably but you’d also be certain that the interest won’t change.

Before settling for the first ARM offer that comes your way, here are a few actions you can take to ensure that you get the best offer possible. 

Shop Around:

Don’t settle for the first offer you receive. This is the biggest financial decision of your life. Let the gravity of that sentence sink in as you continue your search for a loan that works for you. Don’t let a lender pressure or bamboozle you into a loan that doesn’t work for you. 

Make Sure You Know the Terms:

The terms of a home loan aren’t always clear-cut. Be sure to do your due diligence in researching what questions to ask when finding a home loan. You must ask questions, understand the answers thoroughly, and ask for further explanation if needed.

Understand the three number sequence that is accompanies an ARM. Such a sequence might look something like —3/1/6. In this example, you’re first given the initial cap change of 3, which is the maximum change allowed the first time the rate is adjusted. This maximum is often higher than subsequent changes. The second number represents the periodic change cap. This number, which in our example is 1, is the largest interest rate adjustment allowed during all other changes. The final figure is the life cap or the maximum adjustment that can be instigated during the term of the loan. In our example the life cap is 6, which is typically the highest amount you’ll see for a life cap on a first mortgage.

Ask Yourself “What if?”:

When it comes to a mortgage, the unpleasant questions are the ones that need to be answered first. Understand how a 3% rise in the interest rate would affect your bank account in the first adjustment period. If you secure a loan with an interest rate that can be altered every six months, could you afford a big spike in the rate? Would your ability to pay and the security of your home be jeopardized by an upward trend in mortgage rates? Look at the actual numbers.

Study Financial Trends:

ARMs are linked to the market. Study what’s taken place in the market over the past 12 months and read up on what the experts are predicting. Check the index your prospective lender uses to determine if rates will rise, fall or stay the same. Ask the loan company what index they utilize to calculate if your mortgage payment will change. Lenders should be able to provide such information as well as the margin, which is the additional amount the lender adds to the index rate. It is usually from one to three points and is constant for the length of the loan. Study the index’s past performance to determine how stable it is and how often it changes. Some indexes will be adjusted monthly.

Purchase A More Pocket Friendly Home:

You shouldn’t have to compromise on your dream home. But if an ARM gets out of hand, that dreams can quickly morph into a nightmare. But just because you’re settling now doesn’t mean that you’ll always live in the same home. Buying a less expensive home at a fixed-rate can pay dividends in the next five to ten years. By paying more than interest on a loan, the homeowner benefits in two ways.

First, because the consumer is paying principal and not just interest, they are slowly retiring the debt on the house, building equity and actually becoming the owner of the property. If the owner sells the home ten years down the road, he or she will realize a profit that can go towards the down payment for a bigger and better home.

A fixed-rate mortgage also allows you to benefit more from any appreciation in the property. If in ten years, you’ve paid $12,000 in principal on a home worth $100,000 and that same home rises in value by 3% per year, which is a negligible amount, then you would have a home that’s worth about $134,000 and a total gain of $46,000. $46,000 would be quite helpful in purchasing your new dream home!

Try to think in the long term when it comes to home ownership. It can pay off in a very short amount of time, especially if you live in an area where property and home prices continue to escalate.

Although an Adjustable Rate Mortgage may look promising at first glance, it does have its pitfalls. When purchasing a home carefully consider all of your options, do your homework and think about the future and what will be best for you and your family. When in doubt consult with one of the many agents at Affiliated Mortgage. To help kickstart your financial planning, take advantage of the company’s mortgage calculator.  

© 2019 Affiliated Mortgage, LLC. NMLS #14211: AZ NMLS#0947858. All Rights Reserved. Affiliated Mortgage, LLC is a Division of Lend Smart Mortgage NMLS #4474

Developed and designed by https://blairallenagency.com

Leave a Reply