What is an adjustable rate mortgage and is it the right mortgage for you? An adjustable rate mortgage is a mortgage loan in which the interest rate is adjusted periodically (i.e. monthly) and varies according to specific benchmarks. ARM interest rates fluctuate according to the interest rates in the economy. For example, lenders may base their ARM rate on government treasuries or loans associations.
The rate adjustment is based on an index (lender’s rate) and reflects the cost of borrowing on the credit markets. Part of the interest rate risk of the lender is transferred to the borrower. Payments may change over time depending on the underlying market rate of which the ARM rate is linked to.
ARMs are typically offered at initial discounted rates that are lower than fixed mortgage rates. However, ARM rates will then fluctuate as general interest rates go up and down. In the US adjustable mortgage rates are typically regulated and capped by the Federal government to protect consumers.
ARM loan caps allow borrowers a certain measure of certainty and protect against payment shock. These caps regulate how much and how often these types of interest rates can change in a year and over the lifetime of the loan.
Interest rates and mortgage options are constantly changing. The following provides some things to consider when deciding on an Adjustable Rate Mortgage:
- Your view of the future. If you plan to stay in the house for only a couple of years then an ARM loan with its initial lower monthly payments could free up cash for other uses.
- If you have an unpredictable cash flow, your income is expected to increase or you are expecting a large windfall in the near future, ARMs enable you to make small payments until your cash flow increases.
- Adjustable mortgage rates are good for those that may find it difficult to obtain a fixed rate mortgage such as those with low incomes or assets. It is also good for those that want to be able to mortgage a larger house than they would otherwise qualify for with a fixed rate mortgage
- Your investment goals. If you want to have more cash flow for investment purposes, the lower interest rate of an ARM would give you more funds in which to invest with.
- Your risk tolerance. If you can afford a future increase in your monthly payments, it might be worth the risk if it saves money now.
For the financially savvy, a 5 to 7 year ARM may be a good choice because it maximizes your monthly budget. However, make sure you know how long the introductory rate lasts. Also, if there is a risk of the ARM at some point going beyond your budget, you might want to consider having a clause in the mortgage agreement that would allow you to convert the ARM to a fixed rate mortgage at a specific time.
Aurora, a leading financial services company, has funded billions of dollars in loans across the United States and serves clients nationwide in more than 18 states and jurisdictions. A Direct DE FHA Lender, Aurora provides a broad range of financial products and services, including consumer banking and credit, corporate and investment banking. We have access to some of the best loan products in the industry. Leveraging our size and connections, we’re able to offer you the best rates available.
For more information on Aurora Financial, visit www.auroraf.com or call 1-(877) 887-1117.