The current mortgage meltdown in the United States has
given the adjustable rate mortgage a black eye. Used
properly, it can be a smart way to use money to your
advantage. Here's the breakdown on the ARM and how and
when to use it without hurting yourself.
What - The adjustable rate mortgage is a form of financing
that has fallen out of favor as of late. Instead of
getting an interest rate that stays the same throughout the
life of the loan, the ARM adjusts - or changes -
periodically depending on current market conditions. It
can be adjusted upwards or downwards (usually on a
quarterly basis) depending upon what direction the rate the
loan is based upon moves.
If you get an ARM loan and interest rates go up, your
payments can increase - sometimes dramatically. By the
same token, if they fall, your payments will fall. Most
lenders have a clause in your contract that sets a ceiling
on how far or how fast your rate can increase. If you have
bad credit, your lender may have a floor interest rate
built in that says your interest rate will never drop below
a certain level, regardless of how low interest rates get.
When - There's a time and a season for everything, and ARMs
are the same way. If you have serious credit issues that
you're trying to resolve, an adjustable rate mortgage just
might get you an approval when everyone else is saying
"no". At the same time, if you think you may be moving
soon, it might make sense as well.
Who - The best time to consider the adjustable rate
mortgage is if you have a lot of uncertainty or instability
in your life. For instance, if there's a strong likelihood
that your company will relocate you halfway across the
country in a few months and you're planning on selling your
home anyway, it could make good financial sense to utilize
this strategy. It could free up cash for a move. If
interest rates take a huge jump in a short period of time,
it isn't likely to hurt you much because your loan will be
paid off with the sale of your home.
Why - An ARM has less certainty than a fixed rate loan. If
you want to save money and you can handle the risk that
rates might jump dramatically upward, this might be a good
strategy. However, I want to caution you that there is a
lot of risk in taking this approach. If you can't afford
to make dramatically higher payments if rates rise or your
budget relies heavily on consistency, don't get an ARM.
As you can see, the adjustable rate mortgage doesn't come
without some risk. But if you know the risks - and the
rewards - going in, an ARM might be a sound financial
decision. The best thing you can do is to sit down with a
calculator and make some best and worst case budget
calculations. If you're a risk taker and you can handle
it, you could save a lot of money.
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Darrin Roseborsky is a Refinance Specialist with OMAC
Mortgages, seminar speaker and president of the Roseborsky
Group and HomeRefinanceCoach.com. Darrin can help you
MAXIMIZE your equity PROPERLY and help you choose options
that make the MOST SENSE for your situation! Learn more
about how it works at: http://www.homerefinancecoach.com
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