Adjustable Rate Mortgages - ARMs
Adjustable mortgages (ARMs) fluctuate with the market level of interest rates, and so does your monthly payment. Because this is likely to be a big monthly expense, an ARM that is adjusting upwards may wreak havoc with your budget.
Financial Impact of ARMs
When considering an ARM, you absolutely, positively must understand what rising interest rates would do to your personal finances. Only consider taking an ARM if you can answer all of the following questions in the affirmative.
Length of Ownership
If you don't plan or expect to stay in your home for a long time, you should consider an ARM. Should interest rates rise, however, you can end up paying more interest in subsequent years with an adjustable-rate loan.
Impact of Interest Rates
When choosing between an adjustable-rate mortgage and a fixed-rate mortgage, many people don't realize that they are making a choice between a mortgage on which the interest rate is determined by either short-term or long-term interest rates.
ARMs Changes and Caps
Lenders usually adjust the interest rates on their ARMs every six or twelve months, using the mortgage-rate formula involving a number of factors. ARMs also have caps - limiting the amount of change that can occur in the actual rate that you pay.
More About ARMs
Adjustables (ARMs) are more complicated to evaluate and select than fixed-rate mortgages are. In addition to understanding points and other loan fees on fixed-rate loans, you'll also be bombarded with such jargon as margins, caps, and indexes.
Predicting Interest Rates
All the logicians out there are probably commenting that the choice between an adjustable-rate mortgage and a fixed-rate mortgage is simple. The problem is that the movement of interest rates is not logical, and you certainly can't predict it.