How to Select Adjustable Rate Mortgage

Should you consider an adjustable rate mortgage (ARM)? The interest rate of an ARM is tied to an index rate. Periodically the monthly payment on an adjustable rate mortgage may go up or down depending upon whether the index rate it is tied to has gone up or down.

Obvious advantages - An adjustable rate mortgage has two obvious advantages. One, at the beginning of the mortgage term the monthly payment will be lower. Two, the payment to income ratio will be lower therefore it may be possible to qualify for a larger loan amount.

Know ARM definitions - There are three basic terms to know when considering an adjustable rate mortgage. One, index rate – the rate that the mortgage will be tied to, such as a one, five or ten year treasury security. Two, margin – the amount the interest rate on the mortgage will fluctuate. A margin of two means the interest rate will be two points above the index rate. Three, caps – ceilings on how much the interest rate can go up each period. There also may be caps on the interest rate over the life of the loan and caps on the actual amount of the payment.

Be cautious - Depending on the situation an adjustable rate mortgage can be a wise idea. However, an ARM can also lead to an unanticipated large increase in a monthly mortgage payment. Payments may go up $200 or more at one time. If considering an ARM, discuss it in depth with your financial institution. Don’t be timid about getting a second opinion.

By : ABC Loan Guide