Adjustable Rate Mortgage
A Good Idea or Too Risky |
By Louie Latour |
|
If you are considering using an Adjustable Rate Mortgage to finance
your home there are a number of things you need to know first. Here
is what you need to know about Adjustable Rate Mortgages.
When used correctly adjustable rate mortgages or ARMs can be an
effective financial tool. Adjustable rate mortgages are simply a
mortgage with a variable interest rate. Your mortgage lender will
adjust this interest rate to their going rate at regular intervals
throughout the life of the loan. The problem with an ARM is that
when interest rates rise, your monthly payment can go up
significantly when your lender adjusts the interest rate.
When can you use adjustable rate mortgages effectively The
answer to this question depends on your situation. Adjustable rate
mortgages come in different varieties including hybrid,
interest-only, and option loans. Each of these types of mortgage has
different pros and cons; many of which can be used effectively as a
short term fix to your financing needs.
Because adjustable
rate mortgages come with lower interest rates than traditional fixed
rate loans, they are ideal for short term situations where you need
to make lower monthly payments. I stress short term because of the
fact that your lender will adjust your payment amount at regular
intervals, and at the beginning of the loan most of your payment
(all of it in some cases) is being applied to interest. This means
you will build very little equity in your home and pay back very
little of the principal loan balance.
To use ARM loans
safely, make sure your mortgage comes with favorable rate and
payment caps. Caps prevent your interest rate and monthly payment
from rising too much. There are caps that limit change during
interest rate adjustments, and caps that limit total change over the
life of the mortgage. To protect yourself make sure your mortgage
comes with the best caps available. To learn more about using
adjustable rate mortgages safely and effectively, register for a
free mortgage guidebook. |
|
|
|
|
|
