Adjustable Rate Mortgages - Understand the Benefits Compared to a Fixed Rate Mortgage

Adjustable rate mortgages can be very tempting to home buyers, yet they carry a great deal of uncertainty. Fixed rate mortgages offer rate and payment security, but they are more expensive. It is important to weigh the pros and cons of ARMs and fixed rate mortgages before you decide which is right for you.

There are many benefits with an adjustable rate mortgage. One benefit is that they usually feature lower rates and payments early on in the loan term. Lenders can use the lower payment when qualifying borrowers, therefore borrowers can purchase larger homes than they could otherwise afford. ARM's allow borrowers to take advantage of falling rates without refinancing. Instead of having to pay closing costs and fees, borrowers can just sit back and watch their rates fall without worrying about these extra costs. Adjustable rate mortgages can help borrowers save and invest more money. Someone who has a payment that is say $200 less with an ARM than with a fixed-rate mortgage for a couple of years can save that money and earn more off it in a higher yielding investment. This type of mortgage also offers a cheap way for borrowers who don't plan on living in one place very long to buy a house.

There are also a few drawbacks with Adjustable rate mortgages. One drawback is that rates and payments can rise significantly over the loan period. For instance, a 6% ARM can end up at 11% in just three years if rates rise in the overall economy. A borrower's initial low rate will adjust to a level higher than the going fixed rate level in almost every case because ARMs have initial fixed rates that are set artificially low. The first adjustment can be hard hitting because some annual caps don't apply to the initial change. Someone with an annual cap of 2% and a lifetime cap of 6% could potentially see the rate shoot from 6% to 12% in 12 months after closing rates in the economy skyrocket. Adjustable rate mortgages can be difficult to understand.

Lenders have much more flexibility when determining margins, caps, adjustment indices and other things, so new borrowers can easily get confused or trapped by less than honest mortgage companies. One last drawback to adjustable rate mortgages is that on certain mortgages called negative amortization loans, borrowers can end up owing more money than they did at closing. This is because the payments on these loans are set so low they only cover part of the interest due. Any additional amount will get added into the principal balance.

As you can see there are many pros and cons to adjustable-rate mortgages. You must carefully consider your options before choosing a mortgage that is right for you. Stay informed of all of your mortgage options.

To view our list of most recommended mortgage lenders, visit this page: Recommended Home Mortgage Lenders

Carrie Reeder is the owner of ABC Loan Guide. It is an informational loan website, with informative articles and the latest finance news.

---

Home Loans For People With Poor Credit - Understanding The Requirements For a Subprime Mortgage

Home loans for people with poor credit demand that you... Read More

Why Refinance Back into a 30-Year Loan?

One of the biggest reasons homeowners refinance their mortgage is... Read More

Home Loan Applications Made Easy

You have finally found the home of your dreams. You... Read More

Jumbo Home Mortgage Loans - What They Are and Where To Get Jumbo Loan Financing

A jumbo mortgage is different than a conforming loan. A... Read More

How To Get The Best Home Equity Loan

Are you wondering how to get the best Home Equity... Read More

Should You Get a Home Inspection?

It's very important, and in my opinion, mandatory to have... Read More

Bad Credit? With Poor Credit You Can Still Refinance Or Get A Home Equity Line Of Credit

Have you decided to refinance your home or apply for... Read More

Multi Family Property Living

While most multi family properties are designed to allow the... Read More

Selecting the Right Mortgage for You

A mortgage is a loan you take out to buy... Read More

Understanding a UK Commercial Mortgage

In many ways a commercial mortgage is just like a... Read More

Do Your Homework - Find the Mortgage That Fits Your Lifestyle and Your Budget

You've been looking at houses for months, and finally you've... Read More

A Guide to Getting Bad Credit Home Improvement Loans

You might be wanting to look into bad credit home... Read More

Internet & Mortgage Calculations

"You've been approved!" The words you have always wanted to... Read More

Decision Time: Home Equity Loan or Home Equity Line of Credit?

Home equity loans and home equity lines of credit continue... Read More

First Time Home Buyer Loans Made Easy

When it comes to firsttime home buyer loans, a little... Read More

Why Refinance Back into a 30-Year Loan?

One of the biggest reasons homeowners refinance their mortgage is... Read More

Your Mortgage Rate Compare and Save

When trying to obtain the best mortgage rate compare offers... Read More

Home Loans and Mortgages ? Tips to Avoid Foreclosure

Today's real estate market is a volatile one; prices are... Read More

Home Loans: To Substantiate Financial Possibilities On Your Land

Availability of Home loans is in full bloom. They are... Read More

Who Else is Ready to have Their Money Work Harder for Them?

What does it mean to refinance? Why would anyone want... Read More

I Have A Slice of the American Dream and It is a 30 Year Nightmare

Well, we did it. We are buying a beautiful, brand... Read More

Secrets Your Banker Wont Tell You - Which Loan is Best for You?

Recently I was driving in my Car and I heard... Read More

First Time Buyer Mortgages ? Transforming Homeless into Property Owners

Having just settled in life, you are finding the rentals... Read More

Mortgage Information

A mortgage is borrowing money using property as a security,... Read More

Stopping Foreclosures

If you as an investor understand the process, you will... Read More

40-Year Mortgages: An Alternative to Interest-only Loans?

Interest-only loans are quickly becoming a mainstream loan product. Borrowers... Read More

How To Find A Mortgage With Bad Credit

Shopping online for mortgages ought to be trouble free, even... Read More

Tips for First Time Home Buyers

When looking at tips for first time home buyers, you've... Read More

Bad Credit Home Loans

There was a time that seems like decades ago when... Read More

California Refinance - Refinancing in California

The real estate market in California is booming. Home values... Read More

Mortgage ? What, Why, When, and How?

What is a mortgage? Here's what The New Merriam ?... Read More

Homeowner Loans ? Drawing Lessons of the Past

Loans are not of a recent origin. People used to... Read More

Adjustable Rate Mortgage - How They Work?

How does an ARM work.The borrowers interest rate is determined... Read More