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ARM Loans - What Is an Adjustable Mortgage and Should I Use One?

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By : Corey Bruhn    99 or more times read
During the last boom in real estate one of the popular ways to purchase a new home and refinance an existing mortgage was to use an ARM Home Loan. Unfortunately, ARM home loans became one of the major sources of foreclosure and financial difficulty for many people across the country. This took both banks and home owners off guard and many are still reeling from the effects of the last real estate crash!

How Does a ARM Home Loan Work

A home mortgage with an adjustable rate will give borrowed a short period where the loan has a fixed rate, often 3-7 years. After that the loan starts to adjust and in most cases the loans adjust upwards. However for taking the shorter fixed rate period borrowers are rewarded with much lower rates when compared to a fixed rate mortgage.

How Will The Adjusted Rate Be Figured Out?

Each ARM home loan has a loan index and margin that will help determine the rate once the loan adjusts. The loan index is tied to the financial markets such as the LIBOR or MTA index. The margin is a lender set number that is added to the current index rate and the total of those numbers is the new interest rate.

How High Can The Rate Go

Most ARM mortgages will not go over 14% and have caps in place to protect the home owner from big jump. The caps will limit the amount the loan can increase on each adjustment, usually 1-2% and also the maximum rate that the loan can adjust to.

Is an Adjustable Rate Mortgage Right For Me?

That's a hard question to answer but generally if you plan on living in your home for a long time then no an ARM home loan is not for you. But if you plan on moving, refinancing for a large expense before the fixed rate period is up then you might just benefit from an adjustable rate mortgage. It is best to talk your goals over with your lender and let them help you decide.
Where Can I Learn More About ARM Mortgages

To learn more about the options you have when trying to decide on an Adjustable Rate Mortgage visit where you can read all about adjustable mortgages and make an informed decision for yourself and your family!

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