Over the past year, there has been a lot of information about Adjustable Rate Mortgages (ARMs). Many publications and news outlets have said that adjustable rate mortgages are the reason for the mortgage crisis that started in 2008. Several also state that ARM loans are the reason for the high foreclosure rate.
Some of the information is true, ARM mortgages have received a bad rap during this process. Yes, ARM loans are not for every person and you should only consider an ARM mortgage as long as you know the terms of the mortgage.
Below are some reasons why one should even consider an ARM loan.
First off, you must ask yourself how long you plan on keeping the home loan or staying in the home. The average person stays in their home about 5-7 years before they sell or refinance their house. The average American only keeps their home loan for about 5 years as well.
Since several home owners only keep their mortgage loan for a short period of time, that was the basic design on an ARM loan. The ARM loan gives you a lower rate than a FIXED rate mortgage for a period of time. Once the lock period ends, then the rate can change.
Keep in mind that how long you plan on keeping your loan or home can play an important part in your decision to go with a FIXED rate or an ARM loan. For example, if you plan on staying in your home for 5 years and the current FIXED rate is 5% while an ARM rate is 4.5%, then by going with a 5 year ARM could save you thousands over the first 5 years.
A FIXED rate loan is a great option for homeowners that plan to keep their property for a longer period of time. If you are uncertain of how long you plan on keeping your house, then a FIXED rate mortgage would give you the peace of mind of knowing your rate and monthly loan payment would not change.
ARM loans are a great option if you understand the loan term itself and are used for the right reasons. Some people that have ARM mortgages now have actually seen their interest rate drop. The terms of how the rate changes will be in the mortgage note. Each ARM loan is different, so it is crucial to understand how the rate is calculated once the loan goes into the adjustment period.
Here is a reasons to never do an ARM loan. If the only way you can qualify for the home loan is to go with an ARM loan, this is bad reason to do an ARM loan because once the mortgage adjust, you might not be able to make the new monthly mortgage payment.
For the most part, what got home owners into trouble with the ARM loans is that they did not understand how their monthly payment would be affected once the mortgage went into the adjustment period.
David White is a Senior Mortgage Officer who specializes in home loans. He has over 12 years experience helping his clients with Southlake home loans
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