Adjustable rate mortgages are loans that offer the buyer low interest rates for some set period of time, such as five years. These rates will fluctuate depending on the prevailing market interest rate.
Of course, this means that the interest rates rise or fall depending on the market situation.
This fact is especially important when you are living in a crumbling economy like that of the United States with hardly any national income growth these days.
These are the basic features of adjustable rate mortgages:
Most people pocket some pretty dollars in the housing boom if they have ARM agreements. This happens because they took the mortgages when the interest rate was low and they can therefore sell these houses when the interest rates are high.
You shouldn’t plan to stay in the same house for the long term if at all you want to enjoy the benefits associated with ARMs.
A great benefit enjoyed with adjustable mortgage rates is the fact that there is no need to refinance the loan in case the interest rates are dropping. The overall payment and monthly interest rates instead drop at the scheduled evaluation rate thus adjusting to the market condition. This is not the same case with fixed rate mortgages where one must refinance the mortgage in order for the rates to drop.
Since adjustable rate mortgages’ interest rates are usually lower than those of fixed exchange rates; owing to the discounts offered, the borrower can comfortably afford the risk of a future increase in the rates. We can, therefore, say that the buyer of an ARM ends up saving some money due to the lower interest rate paid initially.
Recently, an observation of the current crisis in America has laid the blame on ARMs for the housing crisis being faced. However, this is not the case because there are several other thousands of mortgagors who are enjoying great benefits attributed to ARMs. It all depends on the choices that one makes. If you are looking to buy a house as property investment, this might be a great option. It is also important to be on look out to know when the interest rates have began to rise so that you can sell the house and earn some profit.
Do you have an ARM? Would you purchase a house with an ARM? Why or why not?
YFS is owner and author of Your Finances Simplified. He was born and raised in West Philadelphia and is now a financial adviser, IT contractor, landlord, and treasurer of a non-profit. He created his blog partly due to his desire to help people with their finances.