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Learning about Adjustable Rate Mortgage

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By : Roby Hicks    99 or more times read
If you want to purchase a home, you will need to apply for a mortgage loan. However, it is not that easy to find a good mortgage especially if you are not aware of the various mortgage terms. There are several terms, one of which is the adjustable rate mortgage or ARM. Although this is a good term, it is not for everyone. To know if this is right for you, you have to understand what it is, its benefits and its pitfalls as well as deciding when to use it.

ARM, defined:

ARM is a kind of mortgage loan that does not have a fixed interest rate. There are different periods in this type of mortgage loan. There is the initial period and the adjustable period. During the initial period, no changes in the rate will take place. This can last from six months to ten years. The changes in the interest rates will start during the adjustable period. The rate can either increase or decrease.

The changes in the rate depend on two factors. These are the indices and the margin. There are several types of indices that influence the rate but the commonly used index by various lenders are the Constant Maturity Treasury and London Interbank Offered Rate. Margin also affects the rate, as this is the percentage that can be added to the index. There is also the ceiling and floor. This affects how much the increase and the increase in the rate will be.

The pros and cons of ARM:

One of the key reasons why some people pick this type of mortgage loan is the fact that its initial interest rate is low. If the initial period lasts for five to seven years, this would mean that, the borrower could save significant amount during that period.

Although it is beneficial, there are also some drawbacks of the ARM. One of which is the fact that they often go up after the initial period and will continue to go up in the coming periods. The amount you pay monthly will also change, which makes it difficult to prepare the exact
amount you need to settle your monthly obligations.

When to use ARM?

ARM is not for all. You can only use it in certain circumstances. One is when you will not stay in the house for long. If you think that you will only stay there for three to five years, then ARM is ideal for you because you can sell the property after that period or after the initial period. This way, you will save on interest.

You can also use this type of mortgage loan if you are certain that your income will increase in the coming months or years. You may have seen improvements in your business and have projected an increase in your cash inflow. You might be promoted and your salary will be adjusted in the future.

ARM is good but it is not recommended for all. Before you choose this type of mortgage, see to it that you fully understand it first.

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