Adjustable Rate Mortgage Facts
Adjustable Rate Mortgages, also known as ARM's, are home loans that are based on specific economic indexes. This means that your rate and monthly payments change along with changes in the attached index. If managed properly, this can be very beneficial for the borrower. Before obtaining this type of home loan there are several things that need to be taken into consideration.
Factors to Consider
When searching for the best adjustable rate mortgage, there are several aspects of the loan that should be looked at. The main aspects are the Index, Margin, Rate Cap and the Adjustment Period. The index is what adjustable rate lenders use to measure changes in the interest rate of your loan. The Margin of the loan determines the profit that the lender receives on the loan. If you plan to keep your home loan for a several years, pay close attention to the rate cap; which is the maximum rate that can be reached during the course of the loan. The adjustment period is the minimum period of time that occurs between rate adjustments.
One more thing that needs to be considered is the effect of negative amortization. If handled properly, this can be a useful tool for your financing, but if it is not monitored, you may end up owing more than the original loan amount.
Why ARM's can be Beneficial
The initial interest rate on the loan is usually very low, which enables the borrower to qualify for a larger loan amount, or use the saved money for other purchases or investments that they need to make.
