Is an Adjustable Rate Mortgage Good for Me?

Home buyers will find it easier to qualify for an adjustable rate mortgage over a fixed rate mortgage. Adjustable rate mortgages (ARMs), also called variable rate mortgages or floating rate mortgages, are attractive to home buyers because of their low introductory interest rates. But know that interest rates are fixed to a fund index, which means your monthly installments will certainly increase. It is imperative to know which specific index a loan is tied to as you consider this option. Home buyers need to calculate future higher payments after the initial term when deciding the price range of house they can afford to buy. Succeeding payments could become so expensive that foreclosure may loom.

Beware of Teaser Rates

Adjustable rate mortgages often have teaser rates that lure in unwary home buyers. These unbelievably low interest rates inevitably climb. This low rate usually ends after six months or one year, and then the rate adjusts according to the mortgage's index. Generally, ARMs have monthly, yearly or lifetime caps that limit the allowable increases. Don't even consider a mortgage that does not have a cap. Caps safeguard homeowners from extreme increases in monthly payments; however negative amortization can occur due to not significantly reducing the amount of principal owed.

Research a Potential Loan's Adjustment Period, Index and Margin

There are three additional items to look at with an ARM, the loan's adjustment period, index and margin. The adjustment periods of an ARM ranges from monthly adjustments to yearly adjustments and various other increments. ARMs with yearly adjustments offer more security, making certain of fixed amounts for at least a year's time, while ARMs that adjust more frequently can be nerve-wracking.

The index of your floating rate mortgage determines the variance of the interest rate. Among these indexes are Certificates of Deposit, Treasury Bills and the London Interbank Offered Rate Index or even the banks' own index. Learn the index your loan is tied to and its performance as you decide whether to go with ARM or not. The margin is the amount your lender will receive as profit from your loan.

Variable Rate Mortgages Attract Short-term Homeowners

There are some good rationales to get a variable rate mortgage. If you know that you will be receiving a promotion soon, you know you'll be able to handle the higher rates. Also, if you will only live there a few years, that's another good reason to go with the lower ARM interest rate. However, if you plan to hold on to the property more than 5 years, another type of loan would be wiser. You may want to consider a convertible or hybrid loan which begins as an adjustable rate mortgage and changes to a fixed rate mortgage later.

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