Signing an ARM Mortgage Loan May be Risky

ARM stands for adjustable rate mortgage. It means that instead of accepting a fixed interest rate for the life of the loan, you would sign up for an ARM mortgage loan, and the rate will adjust at various times. The ARM is available on conventional loans (non-government insured) only. There are several types of ARMs, so it’s important that you read all of the fine print.

The name of the loan describes what it is, but there are several types of adjustable rate programs. The reason people sign up is that the rates sometimes go down, and when that happens so does the monthly payment. Of course the opposite is also true, and that’s why ARMs are considered a bit risky. There usually are caps in place so that your interest and payments can’t go above a certain amount.

There are pros and cons to both fixed rate and adjustable rate mortgages. With a fixed rate loan, you have the peace-of-mind of knowing the interest and payment won’t be going up over the life of the conventional mortgage. You may miss an opportunity to pay less interest and a lower payment at some point, and there is no flexibility in the mortgage.

When you take out an ARM mortgage loan, you have the immediate benefit of a lower interest rate. Generally it’s about two points lower than the fixed rate. Because you’re paying less in interest, you may qualify for a higher loan amount. If you are lucky, the rates will drop over the life of the mortgage and you’ll end up doing better than their fixed rate mortgage friends.

On the other side of the coin is the fact that the interest rates usually go up after the first adjustment period. If they keep rising, so will the rate and the payments. There are a number of ARM mortgage loan programs and this is why it’s important for you to understand the various requirements.

A one year ARM mortgage loan means that the rate will adjust every year for the thirty or however many years the mortgage is in effect. It also means that your house payment will change each year as well. Some people choose this option because they can’t qualify for a loan at higher interest.

Two more categories are the 3/3 and 3/1 or 5/5 and 5/1 ARMs. It means that the interest rates in these ARM mortgage loans will change every three or every five years. Or they will stay the same for the three or five years and change starting with the fourth or sixth years. To be clearer, say that you have a 3/3 ARM, starting in the fourth year, the interest rate will adjust every three years. With a 3/1 ARM, the rate will adjust each year for three years and then remain stable.

Other choices are a 7/1 and 10/1 ARM. These choices may seem strange and/ or complicated, but there are reasons for them. Home buyers select various ARMs depending on how long they plan to stay in the house. You may also be able to live with the payments for a fixed number of years and feel you can better accommodate changes in a few years. Your credit rating will also influence the mortgage choices open to you.

We know that all of this is confusing, so we’re right here to help you negotiate the maze.