Mortgage Loan - Adjustable Rate
Mortgage ARM Basics |
By Louie Latour |
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If you are considering or have already used an Adjustable Rate
Mortgage (ARM) to finance your home, you need to understand the
risks inherent to this type of mortgage. Here is what you need to
know about Adjustable Rate Mortgages.
Adjustable Rate
Mortgages are attractive to homeowners for a variety of reason. Low
interest rates and low monthly payments compared to traditional,
fixed rate mortgages are at the top of the list. Many ARM loans come
with introductory rates that save you cash during the introductory
period. There is a dark side to these mortgages, a dark side that
could wreck your monthly budget and even cost you your home.
The problem with Adjustable Rate Mortgages is that when the
introductory period ends, your mortgage lender will adjust the
interest rate at regularly scheduled intervals. The interest rate
you receive after an adjustment is tied to some financial index,
plus the lender will add a premium markup to this index. When all is
said and done your monthly payment will be adjusted according to
this new interest rate. The Federal Reserve has made a habit of
raising short-term interest rates for the last several years. What
does this mean for mortgage interest rates? When the Fed raises
short term rates that Adjustable Rate Mortgages are tied to, your
mortgage interest rate and your monthly payment are destined to go
up along with it.
Why does the Fed raise short term interest
rates? The Government believes that by raising short term interest
rates the economy will slow down and offset inflation. This is done
at your expense of course. When interest rates rise too quickly your
monthly payment could stretch the limits of your monthly budget;
this is the risk involved with Adjustable Rate Mortgage loans.
Adjustable Rate Mortgages come in different flavors with different
levels of risk. These loans range from a standard Adjustable Rate
Mortgage, to Interest Only Adjustable Rate Mortgages, to the
ultra-risky Option Adjustable Rate Mortgages.
To learn more
about these risky mortgage loans, register for a free mortgage
guidebook. |
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