What are Adjustable Rate Mortgages?
Also referred to as ARM, adjustable rate mortgage is a type of mortgage loan program where the interest rate is not fixed for the whole term of the mortgage. It is set for a starting period called ‘initial rate period’. The interest mortgage rates are then subject to change depending on the movements in the interest rate index. For adjustable rate mortgage, the borrower pays the interest rate based on a benchmark in addition to an extra spread, known as ARM margin.
Adjustable-rate mortgage programs are attached to a mortgage index like COFI, Libor, or MTA. Most of the times, banks and lenders depend on one of these indices for the mortgage products, however, some banks or lenders may ask you to pick an index of your choice.
A part of the interest rate risk is moved from the lender to the borrower in adjustable rate mortgage. If the interest mortgage rates drop, borrower benefits, but if it increases borrower faces losses. With adjustable rate mortgage there might be a risk of losing your home. If you happen to miss your mortgage payments, you can go into foreclosure and lose the home equity that you have built over the years.
An adjustable rate mortgage is also dubbed as “floating-rate mortgage” or “variable-rate mortgage”.
What are the benefits of getting an Adjustable Rate Mortgage?
Buying a home is an expensive affair, but with adjustable rate mortgage you can have low monthly payments that do not pinch your pocket. When mortgage rates are high, you can still afford a home if you take out an adjustable rate mortgage.
If you have taken out adjustable rate mortgage loan program and the interest mortgage rate plummets, you pay less compared to fixed rate mortgage where you have to pay fixed monthly payment.
It helps home buyers to pick a term that offers a lower initial payment for periods varying from one month to 10 years. It is definitely more cost effective than other mortgage loan programs.
Who qualifies for an Adjustable Rate Mortgage?
People who do not have very good credit history can get adjustable rate mortgage more easily than fixed rate mortgage. To qualify for an adjustable rate mortgage is easy; you can buy an expensive home on low mortgage payments.
Adjustable Rate Mortgage loan program is a great option for those who are looking for lower monthly payments and plan to live in a house for limited number of years. It is also good for those who intend to pay off their mortgage quickly, before the interest mortgage rate adjustment period arrives.