Even after all of the news about people losing their homes because their mortgage loan payments adjusted to a point that they couldnt afford, why would anybody consider an adjustable rate mortgage (ARM)? Adjustable rate home loans do carry more risks than fixed rate loans. They are not for those trying to squeeze into a home they cannot afford, but for some, these risks might be manageable and beneficial.
Adjustable rate home loans may be right for the following individuals:
Those selling their home soon: There are two types of adjustable rate home loans. Standard ARMs have principal and interest payments monthly and the rates will adjust with a specific term. For example, a 1-year ARM will adjust its rate and therefore payment every year. A 3-year ARM will adjust every 3 years, a 5-year ARM every 5 years, etc. If you're positive that you will be selling your home in 3 years, you may be out of the home before
your rate even adjusts.
There are also hybrid ARMs. Hybrids will have a fixed rate for a period of time and will then adjust (usually on an annual basis). For example, a 3/1 ARM will have a fixed rate for 3 years and will then adjust annually for the remaining life of the loan. Some hybrids also have special payment options, such as interest only, during the fixed period, which makes them even more attractive if you are sure that you will be moving. Be careful though, many
good plans fail. Planned moves may end up not happening, forcing a difficult budgeting dilemma if payments adjust out of control.
Those who can handle any rate increase: Adjustable rate home loans are not for people who are "house poor". Some people, however, are in homes that they can easily and flexibly afford with any potential rate increases. It's first important to know what increases can be expected. What's the maximum rate increase on an annual and lifetime basis for the loan you are considering? Usually rates cant adjust more than 2% annually and 5-6% over the lifetime of the loan. If you can handle such increases, you're halfway there.
A couple of words of caution: With hybrid ARMs you need to keep in mind that your rate may not begin to adjust for a few years. By the time the starting variable rate is set, rates may already be higher than where you are today. Also, if there's a special payment option for a period of time, when the loan starts to adjust, it'll also start to amortize, but not for the full 30 years. For example, if it's a 3/1 ARM with an interest only payment option, your payments will be fixed with interest only for the first 3 years, then adjusting to principal and interest, calculated with the remaining 27 year amortization.
Adjustable rate home loans are not for those trying to squeeze into a home that they can't afford. For some, however, adjustable rate home loans might just be the ticket to getting the best deal on home purchases or refinances. With all adjustable rate home loans, you must be sure that you can handle the payments once the adjustments are made.
Remember, a loan is a contract. When you enter into a contract you're expected to honor it, regardless of what life throws your way. The key is cautiously making the decision with careful calculation and with all of the right facts on hand.
It's really important to understand all of the terms of the adjustable rate home loans that you are considering. Dont be afraid to ask the loan officers to spell out these terms. One of the contributing factors to the debacle surrounding adjustable rate home loans was that borrowers were afraid to ask questions.
Lets face the facts, unless you're a mortgage lender, you should have questions. No one expects applicants to walk in the door with all of the answers. However, you must have all of the answers before you sign your name to any loan documents.
Adjustable rate home loans may be right for the following individuals:
Those selling their home soon: There are two types of adjustable rate home loans. Standard ARMs have principal and interest payments monthly and the rates will adjust with a specific term. For example, a 1-year ARM will adjust its rate and therefore payment every year. A 3-year ARM will adjust every 3 years, a 5-year ARM every 5 years, etc. If you're positive that you will be selling your home in 3 years, you may be out of the home before
your rate even adjusts.
There are also hybrid ARMs. Hybrids will have a fixed rate for a period of time and will then adjust (usually on an annual basis). For example, a 3/1 ARM will have a fixed rate for 3 years and will then adjust annually for the remaining life of the loan. Some hybrids also have special payment options, such as interest only, during the fixed period, which makes them even more attractive if you are sure that you will be moving. Be careful though, many
good plans fail. Planned moves may end up not happening, forcing a difficult budgeting dilemma if payments adjust out of control.
Those who can handle any rate increase: Adjustable rate home loans are not for people who are "house poor". Some people, however, are in homes that they can easily and flexibly afford with any potential rate increases. It's first important to know what increases can be expected. What's the maximum rate increase on an annual and lifetime basis for the loan you are considering? Usually rates cant adjust more than 2% annually and 5-6% over the lifetime of the loan. If you can handle such increases, you're halfway there.
A couple of words of caution: With hybrid ARMs you need to keep in mind that your rate may not begin to adjust for a few years. By the time the starting variable rate is set, rates may already be higher than where you are today. Also, if there's a special payment option for a period of time, when the loan starts to adjust, it'll also start to amortize, but not for the full 30 years. For example, if it's a 3/1 ARM with an interest only payment option, your payments will be fixed with interest only for the first 3 years, then adjusting to principal and interest, calculated with the remaining 27 year amortization.
Adjustable rate home loans are not for those trying to squeeze into a home that they can't afford. For some, however, adjustable rate home loans might just be the ticket to getting the best deal on home purchases or refinances. With all adjustable rate home loans, you must be sure that you can handle the payments once the adjustments are made.
Remember, a loan is a contract. When you enter into a contract you're expected to honor it, regardless of what life throws your way. The key is cautiously making the decision with careful calculation and with all of the right facts on hand.
It's really important to understand all of the terms of the adjustable rate home loans that you are considering. Dont be afraid to ask the loan officers to spell out these terms. One of the contributing factors to the debacle surrounding adjustable rate home loans was that borrowers were afraid to ask questions.
Lets face the facts, unless you're a mortgage lender, you should have questions. No one expects applicants to walk in the door with all of the answers. However, you must have all of the answers before you sign your name to any loan documents.