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Dangers of Adjustable Rate Mortgages

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By : Corey Bruhn    99 or more times read
The adjustable rate mortgage has been a very popular way to finance a new home purchase and also to refinance existing home loans. The ARM loan does offer some great benefits like lower rates and payments but it also has some risk associated with it that you should be aware of if you are considering one of these loans.

Adjustable interest rate mortgages are exactly what they sound like, a loan that has a rate that can adjust. The rate will adjust after an initial fixed rate period that normally lasts 1-7 years. The most common loan of this type is the 5/1 ARM meaning the loan is fixed for 5 years and adjusts every year for the remainder off the loan.

The dangers associated with these loans are that if anything should change in your credit scores, employment situation or even property values that would make you not qualify for a refinance you could be stuck with the adjusting rate and higher payments.

Being unable to refinance an ARM is the main reason so many people across the country are facing foreclosure, they refinanced there homes at 95 or 100% of the value and when property values sank they owed more then their home was worth and are now stuck with rates that were adjusting to in some cases 14% making the payment too high and in the end foreclosure set in.

In order to avoid this situation you should only take an adjustable rate mortgage if you will have at least 20% equity in your home after the refinance or purchase. These loans also work well for people who know they will be refinancing, moving or buying a bigger home before the loan resets.

If you do not fall into the categories above and are only interested in an ARM loan for the lower payments you should avoid them and stick with a more stable fixed rate mortgage, especially in todays volatile economy.
Adjustable rate mortgages can be dangerous, but also profitable all at the same time. Find out how to protect yourself from adjustable rate mortgages and make money at

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