What is an ARM? When is it smart to get an ARM? When should you avoid an ARM? When you are looking into refinancing or financing your home one of the options you will have is the ARM which stands for Adjustable Rate Mortgage.
Adjustable Rate Mortgages is a loan program that will provide you with a lower interest rate than you would get with a fixed-rate loan. However, this lower interest rate comes at the expense of time. You will only receive this rate for a short period of time. After your fixed rate period is up your monthly payment will actually adjust up and down as interest rates adjusts every year thereafter.
The ARM program was created specifically for times when rates are high. A buyer could opt for the ARM and hope for rates to come down by the time their fixed period is up. Rate terms can vary. Your ARM can be a 3/1 which means your rate is fixed for three years, a 5/1 which means your rate stays fixed for five years. A 7/1 and a 10/1 are other common term periods. After your loan reaches the cutoff year your rate will begin to adjust every year thereafter.
When should you consider an ARM?
1. An ARM can allow you to qualify for a larger loan due to the discounted rate and lower monthly payment. Your mortgage lender can use an ARM to help you plan and coincide with your changing financial needs.
2. If you plan to sell your house within three to four years from the time you obtain your loan an ARM can be useful to you. During the short time you own your home you will be able to take advantage of a discounted interest rate and lower monthly payments. Before your rate adjusts you will be selling your home.
When should you avoid an ARM?
1. When rates are at an all time low there is absolutely no reason to get an ARM. You want to keep the good rate your getting as long as possible. If rates are low there is only one place for them to go...up. You do not want to get to the end of your fixed-rate period and suddenly your payment adjusts through the roof.
2. ARM's are not ideal if you are buying a home you plan to stay in for a very long time. A fixed rate will allow for consistency in your payments long term. If many years go by and rates are lower you can always refinance your loan to take advantage of the lower rates. If rates are decent and you have an ARM on a home you plan to keep you are taking a risk of that loan adjusting beyond your means.
Adjustable Rate Mortgages and their terms can vary. Be sure your lender explains all terms of your contract and do not be afraid to ask questions. A good lender is there to be your guide. He or she should be willing to take your calls and answer your questions promptly and honestly.
Always consider all loan programs and options with a professional before making your choice.
Robert W. Horner is a Residential Mortgage Banker with years of experience. To visit his personal website go to http://www.robertwhorner.com. To view mortgage rates go to http://www.mortgageratescharlottenc.com.
Article Source: http://EzineArticles.com/?expert=Robert_Horner
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