Mortgage Advice: What is an ARM?

Many of you have never heard of an ARM. Many of you have been told to stay away from adjustable rate mortgages. They definitely have their benefits and they definitely have their downfalls.

For those new to real estate, there are a hundred different terms to learn. It can be overwhelming, but if you take it a term at a time, you'll be just fine.

An adjustable rate mortgage is just that. You will have an interest rate that is adjusted by your lender over the life of the loan, depending on a variety of factors. This means that while you may start out with a low monthly payment of $1,000 it could easily rise by hundreds, or even thousands, of dollars.

What are the benefits of an ARM?

You will generally enjoy a lower initial rate. Additionally, these loans may be available for shorter loan periods. This is especially beneficial to buyers who plan on staying in a home for only a short period of time.

ARMs can also be a good option for those who expect a rise in their salary in the future. If a raise is in your future, you may be able to rest easier knowing your rate could rise.

ARMs can also be good for those who are responsible with their money. Those of you who can play today for a brighter tomorrow….these arms are for you! Use your lower up front rate to pay down your mortgage. This can help you pay LESS in the long run!

What are the risks of an ARM?

Your rate could rise so high you would be unable to make your payments. Be sure to ask if there are caps on your loan. Another risk is prepayment penalties. Some, but not all, adjustable rate mortgages will charge you to pay off your loan early.

If interest rates remain low, then the risk from an ARM remains low. But by signing an ARM loan, you are gambling that rates won't rise. If they do, you will see your payments rise as well.

Responsibility is the key. Be sure to ask your mortgage broker the long term ramifications of what it means to be in an ARM. Any respectable lender will be able to spell all the positive AND negative points out to you and help you make an educated decision about your mortgage future.

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