Weighing Your Home Mortgage Options: Adjustable Rate Mortgages
Posted on 30. Dec, 2009 by admin in Loans, Mortgages, Real Estate
An adjustable rate mortgage, or ARM, is a mortgage where the interest rate periodically adjusts according to an index. The most commonly used indexes are:
• Constant maturity treasury (CMT)
• Cost of Savings Index (COSI)
• Cost of Funds Index (COFI)
• London Interbank Offered Rate (LIBOR)
• Certificate of Deposit Index (CODI)
As the above indices increase and decrease according to economic activity, so do the mortgage interest rates associated with ARM’s. Depending on the terms and conditions of each ARM, these adjustments might come annually, or two to three times a year.
In light of the recent mortgage meltdown, less mortgage shoppers today are choosing to finance their home with an ARM. While definitely considered riskier than a conventional fixed rate mortgage, an ARM can provide numerous financial benefits for borrowers in certain situations. Therefore, it is definitely a good idea to understand the key aspects of ARM’s as well as how they work when deciding if one would be right for you.
Pros
As previously stated, an ARM is a mortgage with a fluctuating interest rate that varies in accordance to the market. So while you might pay a lot of interest in the beginning of your mortgage, , should the market drop, so will your interest rate. An adjustable rate mortgage is a good idea for those that plan on staying in a home for between 3-5 years as you can take full advantage of the lower interest rates that ARM’s typically offer. ARM mortgages are available to a wide array of potential borrowers so even if you have bad credit, you should be able to find an ARM that suits your needs. Also, borrowers that can’t afford a high down payment will find that there are ARM mortgages available to cover both the down payment and the actual house payment.
Cons
The biggest issue with ARM mortgages is that they transfer interest rate risk onto the borrower. Interest rates will inevitably rise, and consequently, so will your monthly mortgage payments. It is up to you to decide whether this is something that you would be comfortable with. If you like to have steady payments that are unchanged each month, then an ARM is probably not the best option for you. However, if you are someone that is particularly adept at budgeting expenses than you will find that an ARM gives you an opportunity to save more money than you would be able to with other financing options.
For many borrowers, ARM’s are a very cost effective way to handle mortgage payments. It’s important to do some research on current interest rates in comparison to those six months to a year prior. If unsure of whether an ARM is the right mortgage is for you and your financial situation, be sure to speak with a mortgage professional.
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