Author: Ryann Cairns
Adjustable rate mortgages, or ARM's remain a popular option for many home buyers. Unlike a traditional fixed rate mortgage, adjustable rate mortgages have interest rates that fluctuate along with interest rates in general.
The interest rate on an adjustable rate mortgage is generally tied to a specific interest rate, such as the prime rate. The interest rate on an adjustable rate mortgage, also known as a variable rate mortgage, is capped at a specific interest rate. This feature is designed to protect the home buyer in case interest rates spiral out of control.
The home buyer should be aware though, that the caps on adjustable rate mortgages can be very high, and the interest rate on the mortgage could still rise to a point where the home owner would have trouble affording the monthly payments on the mortgage loan. When considering an adjustable rate mortgage, it is a good idea to use a mortgage loan calculator to determine what the monthly payments would be if the worst case scenario came about and the interest rate rose to the highest allowable level.
Before signing up for a variable rate mortgage, the home buyer should be absolutely sure that they will be able to make the payments in this case. Failure to do so could result in the loss of the home you have worked so hard to buy. When you sign up for an adjustable rate mortgage, you are essentially betting that interest rates will be lower in the future than they are today. The problem with this strategy is that even professional money managers often are unable to accurately predict the direction of future interest rates.
The danger in an adjustable rate mortgage is that interest rates will rise instead of falling, and that your monthly mortgage payments will rise right along with those interest rates. Given these negatives, however, adjustable rate mortgages can be a good choice for some home buyers. Adjustable rate mortgages can be especially useful for home buyers who are not planning to stay in the home long term.
Executives or sales representatives whose jobs keep them moving around the country often purchase their homes using adjustable rate mortgages, for instance. The idea behind this is that when it is time to move, the home buyer can take advantage of the equity they have built up, combined with the rise in the value of their home, to pay off the mortgage and make a tidy profit.
It is likely that a good portion of the mortgage payments made were at the low introductory rate on the mortgage. This can be a wise strategy. While we are on the subject of introductory rates, it is important that the home buyer understand the terms of the low introductory rate. These so called teaser rates are usually in force for a very limited amount of time, after which the mortgage interest rate rises to market interest rates. It is important to be sure you understand all the terms and conditions, whether your mortgage is a fixed rate or adjustable rate mortgage.
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