Is an Adjustable Rate Mortgage a Boon or Bust?

by Greg Cryns

            Adjustable rate mortgages (ARMs) have been making national news a lot lately – primarily because many homeowners bought “more than they could afford,” getting a high-priced home for a lower payment for the first few years.

            What happened when the mortgage actually “adjusted?” Many homeowners could not refinance to a fixed rate mortgage, so their loan payment soared to more than they could afford, causing them to default on their loan.  With an Adjustable Rate Mortgage, both the 

lender and the homeowner get benefits.  The borrower gets lower interest rates and smaller monthly payments.  The lender gets to transfer the risk of interest rates to the borrower after the initial fixed rate period.

            When you get a fixed rate mortgage, your rate will never increase. With an ARM, you have a set period of time that your rate stays the same, but then the lender can adjust it to reflect current rates, including the state of your credit during the readjustment period.

            Adjustable Rate Mortgages can be set to adjust annually, every two, three, or even five years.  Every loan is different and if you’re looking at an ARM, then you need to consider how often the rate can adjust on you.

            On one hand, an adjustable rate mortgage can help the homeowner who wants to secure low introductory rates.  Sometimes people need a helping hand when they’re first settling into a new home, new career, or undergoing other circumstances that require a tight budget.

            The ARM can be helpful in helping you get a better home than you’d normally be able to afford with a fixed rate mortgage.  However, as stated before, you have to be careful that you’ll be able to make the increased monthly payment at the end of your ARM terms.

            For homeowners who find themselves facing a leap in interest rates during the adjustment period, the transition is often hard to overcome.  Even if you can afford the monthly payments, using an ARM can sometimes cause you to pay more over the life of the loan than a fixed rate mortgage would.

            There’s been a lot of talk about predatory lenders talking homeowners into securing an adjustable rate mortgage, so make sure you do your homework and determine whether or not this type of lending situation will keep you financially secure several years down the road.

 

Greg Cryns is the owner of Flat Fee Real Estate Guide - http://www.flatfeerealestateguide.com