Adjustable Rate Mortgages - Explained
ADJUSTABLE RATE MORTGAGES - ARM's can be very complex and available in many structures and hybrids - just the basic concepts of an adjustable rate mortgage will be discussed here. All adjustable rate mortages allow the borrower to lock the interst rate for a set period of time, either 1-2-3-5-7 years. To learn how ARMs work, see: ARM terms. After this short intial 'fixed' period, the borrower will have a baloon payment (the unpaid balance on the loan) due. At this time the interest rate will 'reset' either higher or lower than the original rate. Typically, ARMs are displayed like this: 3/1, 5/1, 5/25, 2/28 or 3/27. The first number is the 'Fixed portion', meaning the interest rate stays fixed for that many years. Thus the borrowers payment is fixed for the set amount of years The second number can mean 2 things: On a 3/1 , after the 3rd year of the loan, the rate adjusts every year based on pre - determined financial indexes - see ARM terms. On a 2/28 ARM, the rate stays the same for 2 years and a new interest rate for the remaining 28 years is recalculated based on similar indexes.
Advantages of an Adjustable Rate Mortgage
ARM'S GIVE YOU TIME TO REPAIR BAD CREDIT- If your credit is bad, the initial low interest rate on the fixed interest portion of the ARM provides the borrower with a lower monthly payment. During this period you should strive to have perfect credit and "GET BACK ON TRACK" - not missing any credit card, student loans, auto payments etc.. You should see an increased credit score by the time the ARM is due to 'reset'; many times an increase of 100 points on your credit score is not uncommon. BAD CREDIT SCORE / HIGH INCOME - Many times, a family suddenly becomes a "2-income household" due to a spouse entering the workforce. This is great regarding future income, but the family may have experienced credit issues due the lack of income in the past - resulting in a low credit score If all of a sudden your household income increases prior to getting a mortgage the ARM may provide a great solution. Your increased income will prevent missing payments and credit history can be re-established in a few years. The lower starter interest rate of the ARM can keep the monthly payments reasonable. PLAN ON SELLING QUICKLY? - If you intend on only staying in the home for a few years the adjustable rate may be a good option. You need to plan your move during the fixed portion of the ARM - before the interest rate 'reset's'.More on adjustable rate mortgages
Adjustable Rate Mortgages - ExplainedAdjustable Rate Mortgages - Terminology
ARM - 3/1 and 5/1 Explained
Should I get an ARM?