Arm Mortgage Loan

An ARM mortgage loan can offer borrowers a flexible choice in home financing and open up the possibility of home ownership. There are, of course, drawbacks to this approach. The potential borrower should do careful research when considering this lending option. While significant savings can result, the possibility of significant expense exists as well. ARM stands for adjustable rate mortgage. The interest rates, and therefore the payments on these loans, can fluctuate depending on current trends. This is very different from standard fixed rate mortgages. With fixed rate loans, the interest remains the same during duration of the loan. The terms for an ARM mortgage loan can vary but usually involve interest rates that will remain fixed for a certain period of time, but then can change from time to time. These variations depend on what current rates dictate and on the terms of the loan. Such loans are believed to carry more financial risks than standard loans since rates can vary widely over a thirty year period. A benefit of the adjustable rate approach is that the beginning rate is generally some what lower than those assigned to thirty year fixed loans. Of course, that rate has the potential of rising significantly over the life of the loan, creating a good deal of extra expense to the lender.

The traditional wisdom is that anyone who is planning on carrying a mortgage for many years or even decades is better off going with fixed financing, while anyone who is only planning on carrying the loan for a short period of time is better off choosing the adjustable rate approach. The basics of how an ARM mortgage loan works can vary, but will generally have some major features in common. Those features could include the initial rate and payment, varying adjustment periods, the index, and the margin. The initial rates for most adjustable rate loans refer to a time period at the beginning of the loan's life during which both the interest rate and the monthly payment are low. This initial time period can range at anywhere from one month to five years or more. Adjustment periods refer to the cycle used to determine when the loan's rates with "adjust." A three year ARM, for example, would see rates and payments change every three years. The index and the margin are the two factors that determine the interest rate. The index measures the current rate trends and the margin refers to fees that a lender will add. All of these factors can make the payments on an ARM mortgage loan move up or down, depending on the terms established by the lender in the original loan agreement. Some loans will establish caps on the amount of interest that can be charged. The possibility of converting to a fixed rate mortgage is sometimes included in the original contract.

When considering an ARM mortgage loan, there are a few questions that the potential borrower should ask. Just how high could a monthly payment go? Is a borrower's income enough to cover the payment in any event, whether the payment goes higher or lower than expected? Will there be other debts in the foreseeable future that could make keeping up with mortgage payments difficult if not impossible? Does the borrower plan on living in the home for a long time or is the plan only to remain in the home for a short period of time and then sell it? What happens if the house does not sell? Does the borrower wish to make extra payments in order to reduce the principle or pay off the home early? What ever lending approach a borrower might choose, whether a fixed rate or an ARM mortgage loan, home ownership can be one of life's genuine blessings. The Bible talks about the importance of honoring God for all of the blessings that He bestows. "O clap your hands, all ye people; shout unto God with the voice of triumph." (Psalm 47:1)

Anyone who is considering an ARM mortgage loan should be aware of the potential drawbacks of this approach. A borrower could find themselves suddenly and unexpectedly facing vastly larger monthly payments if the initial discounted period ends at the same time that interest rates rise sharply. All lenders must offer caps on the amount of increase an interest rate experience. If a borrower is not alert and aware of all of the terms of their lending agreement, they could miss out on some money saving caps as well as paying thousands of dollars in extra interest. A borrower will find themselves in a difficult spot if rates climb to the point of creating a negative amortization situation. The term negative amortization simply means that the monthly payment will not cover the entire cost of the loan's interest. When this occurs, not only is there no money applied toward the principal, but any interest that goes unpaid is added back into the amount owed. In this situation, not only is the borrower not making any progress in paying off the principal, but is actually loosing ground.

A wise consumer will pay close attention to any caps on interest rates that are included in an ARM mortgage loan. Generally, two types of caps are available. A periodic cap will place a limit on the amount of increase in rates that can occur during only one adjustment period. The presence of periodic caps varies. Some loans offer no periodic caps at all. An overall cap is required by law and will set a limit on how high rates can climb throughout the loan's life.

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