Are you considering an adjustable rate mortgage?
ARM loans can offer borrowers many benefits. These home loans have caused financial hardship for many homeowners. There are some important ARM loan borrower considerations. We have created this helpful guide to help homeowners and borrowers focus on the important aspects and characteristics of an adjustable rate home loan so that they will be able to make a sound financial decision when shopping for an ARM loan.
Variable Rate Loan Considerations
The adjustable rate mortgage is a big part in the world of home loans and mortgage lending. There are many misconceptions of this particular mortgage product.
The ARM loan can be a wonderful tool for a homeowner. It can also be the source of a long and dark period of financial hardship. It is important that certain ARM loan borrower considerations are examined closely before you take on this type of financial obligation.
Below is a highlighted list of important adjustable rate mortgage considerations mortgage shoppers need to consider before borrowing with an ARM.
ARM Consideration List
The first thing to consider right from the get go is the initial interest rate that will be charged on the loan. As a borrower you want to get a feel for how that rate will translate to a monthly payment and how that payment fits into your monthly budget.
The duration of that rate
How long will you have the initial rate and when will that rate change.
You need to know if the initial rate is a teaser rate or if it is the normal rate. Many home loans will come with a discounted short term, teaser rate, to entice borrowers. Teaser rates can be great if used by the borrower as an opportunity to reduce the principal amount of the loan quicker by making extra and or higher monthly payments.
Teaser rates as the name implies are tease. They are temporary. The discounted rate will not last and the mortgage will eventually reset. You need to know how long you have with the teaser rate and how it will compare to the regular rate.
The frequency and how often your rate will change is important to know. As a borrower you want to know when to expect a change and how that change will effect your payment. The degree of change in your rate and monthly payment. You need to have a good idea of how a rate change will effect your payment and by how much your rate could change.
What index is used to calculate and determine the interest rate is crucial information that you need to know prior to borrowing with an adjustable rate mortgage. Look at the historical volatility of that index and how it compares to current levels.
The margin the lender is going to tag on to the index used to calculate your interest rate. Always try and negotiate this down.
The rules and stipulations that pertain to prepayment need to fully understood. Is there a penalty? How much? It is best if there is no prepayment penalties involved.
The reputation, size, specialty, and other specific information that pertains to the lender you are dealing with is important to consider. If the lender is small and a new business than one should be more cautious and dig deeper than one would if the lender was highly recommended, nationally known, and has been in business for 40 years.
Be sure to compare multiple offers from multiple lenders.
Overall Market and Historical Level Comparison
Compare the rates and index to historical levels. If historical levels are high than the adjustable rate mortgage is a more favorable option and more likely to go down. If the market rates are low than the adjustable rate is more likely to rise and a fixed rate mortgage may a more favorable option.
Personal Risk Comfort
Some people are able to deal with risk better than others. If you find extreme comfort in absolutes than a fixed rate may be a better choice.
Before making any decision make sure you understand all the options available. There are many mortgage products out there. Take a look at all of them.