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| ARM - Adjustable Rate Mortgage: |
| The adjustable rate mortgage is usually referred to as an ARM. An adjustable rate mortgage (ARM) combines both a fixed rate mortgage and a floating rate mortgage. At the beginning of the mortgage term, the mortgage rate is fixed for certain periods such as 3, 5, 7 or 10 years. After this period expires, the mortgage interest rate becomes adjustable. A popular ARM home loan is the 5 1 ARM Mortgage . In this type of mortgage, the mortgage rates are adjustable after the fifth year, and for the first five years, the period and the borrowing rates are fixed. |
| Benefits: |
Teaser Rate: A teaser rate is the starting interest rate of the arm adjustable rate mortgage. It is lower than the fully indexed rate. Because the initial mortgage rate is low, it is used to attract people. An arm mortgage is ideal for people who intend to stay in their homes for about 5 to 7 years.
Affordability: If current mortgage rates and housing prices are high, this may be ideal for you. You may have a better chance of getting the home loan with ARM since the lender incorporates the gross monthly income and the monthly loan payment amount to determine how much you qualify. Since the monthly amount will be less with a lower interest rate, you might qualify for more.
Interest rates have peaked: By getting the adjustable rate mortgage arm at the peak of the interest rate cycle, the successive rates will be lower as interest rates go down. Your monthly home mortgage payments will be lower during the allowed adjustable period. |
| Drawbacks: |
Complicated to understand: Unlike a fixed rate mortgage, which is simple to understand, there are many variables to consider when calculating adjustable rate mortgage loans.
Interest rates have reached the bottom: By going with an adjustable rate mortgage arm at the bottom of the interest rate cycle, successive borrowing rates during the adjustable period will probably go higher as interest rates go up. Your monthly mortgage payments will become less affordable.
Uncertainty: If you plan to be at your property for more than 7 years, you will be uncertain as to what your new mortgage payment will be because after each adjustment period, you will bet getting new mortgage payments. |
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