Adjustable Rate Mortgages: Five
Things You Need to Know |
By Louie Latour |
|
If you are a homeowner with an Adjustable Rate Mortgage (ARM), or
are considering taking out an adjustable rate mortgage, there are
five things you need to be aware of before diving in. Here are five
things to know about your ARM.
Interest Only Mortgages
Most of the adjustable rate mortgages on the market amortize
interest and loan principal at the same time. Interest only
mortgages do not pay back the loan principal during the interest
only period. Your monthly payments will be significantly lower
during the interest only period; however, at the end of the interest
only period, which can last anywhere from one year to five years,
your monthly payment amount will increase significantly. This can
come as a shock to many homeowners that pushed that ?interest-only
thing to the back of their minds while enjoying the low monthly
payment amount. If you have an interest only mortgage you should
find out when the interest only period ends as soon as possible;
this will help avoid a financial crisis if your monthly budget
cannot support the higher payment amount.
Negative
Amortization
Negative amortization is a dirty word you could
slap your loan officer s face for neglecting to mention. Adjustable
rate mortgages, especially interest only and option loans, have the
potential to grow with time rather than diminish with your payments.
If you have a standard adjustable rate mortgage rather than one of
the more risky varieties, you can still experience negative
amortization depending on how the lender structured the interest
rate and payment caps. If your monthly payment is not enough to
cover the interest due for any given month the lender will add that
interest to the principal loan balance; this is negative
amortization.
Balloon Payments
Mortgages with balloon
payments have a large amount of interest or principal due at a
specified time. These mortgages are attractive to homeowners because
of their low monthly payment amounts; however, if you are unable to
make the balloon payment when it becomes due, your only alternative
is to refinance or sell your home.
Hybrid Mortgages
Hybrid mortgages are a combination of adjustable rate mortgages and
fixed rate mortgages. Most hybrid mortgages behave like fixed rate
mortgages for a period, usually five years, and then convert to an
adjustable rate mortgage at the end of the fixed rate period. An
example of a hybrid mortgage is a 5:1 hybrid loan. This mortgage has
a fixed interest rate for five years; at the end of five years the
lender will adjust the interest rate to the going rate plus markup
every year.
Option Adjustable Rate Mortgages
These
mortgages come with four different payment options during the
option period. The homeowner can choose to make payments based on 30
year amortization, 15 year amortization, interest only, or the
minimum option payment. The so called option payment does not
cover all the interest due for a given month and results in negative
amortization. To learn more about your mortgage options as well as
how to minimize risk, register for a free mortgage guidebook using
the links below. |
|
|
|
|
|
