Adjustable Rate Mortgages Provide Borrowers with Options and Benefits

Do you have an ARM Mortgage ?

Negative media attention has focused lately on adjustable rate mortgages (ARMs). These mortgages have been the recent object of contempt, described as ruinous loans that should never be considered by borrowers. However, such a depiction is not warranted. Many positive elements exist with adjustable rate mortgages, and they are a viable option that should absolutely be considered by people trying to obtain a mortgage. ARMs can be especially useful to existing home owners who need to trim expenses during difficult economic climates as well as first-time home buyers.

Adjustable rate mortgages can provide an ideal situation to first-time home buyers who have a high debt ratio. This ratio is used in determining a home buyer’s interest rate on his or her mortgage. First-time borrowers often have such debts as student loans. These loans are often deferred and will likely be eligible for consolidation upon the time to repay them. However, lenders usually require that these student loans reflect a minimum monthly payment on them in order for the borrower to qualify for a mortgage. Borrowers typically have several deferred loans reported to their credit, while the minimum payments on these loans may multiply with rapidity. Such circumstances can readily take the borrower’s debt ratio to a level that is too high for him or her to obtain a mortgage. Adjustable rate mortgages can be near a rate that is 1% less than fixed-rate loans. Thus, a smaller interest rate may help a person’s debt ratio drop to a more desirable level, enabling him or her to obtain a mortgage.

A further consideration that helps a borrower determine if an adjustable rate mortgage provides more benefits than a fixed-rate mortgage is the question of how long he or she intends to live in the given home. In America, statistics show that people usually refinance an existing mortgage or move into a new home every five years. A rate that is 1% lower on a mortgage with a lifespan of only five years may save a borrower considerable money. Such a loan can, again, help one minimize monthly expenses. An ARM rate can save a borrower $6,000 on every borrowed $100,000 increment.

The most beneficial ARM programs offered on the market today are those of the hybrid loans that are obtained through VA or FHA means. The hybrid is linked to the 12-Month Treasury Average, an index that is among the most moderate in existence. This index works on a rolling average, and thus does not fluctuate wildly in a manner similar to other indexes. The Treasury Average never adjusts by more than 1%. In a worst-case scenario, an additional year would pass before the ARM rate on a hybrid loan increased to more than that of the fixed-rate.

For example, a fixed-rate FHA loan would probably close at a rate of 5% interest at present. However, if a borrower were to instead opt for a 5/1 FHA ARM loan, he or she would likely close with an interest rate of 4%. This rate would remain at 4% for a 60-month period. In month number 61, the loan may adjust to a rate of no more than 5%. Another adjustment would not be enacted for 12 more months. Thus, the adjustable rate mortgage would remain at or below a 5% interest rate for the duration of 72 months. It is noteworthy to again consider that Americans statistically refinance or move every 60 months.

Although adjustable rate mortgages are not a perfect fit for all borrowers and their financial needs, many individuals find benefit in obtaining such a mortgage. Acknowledging the rewards and risks as presented by these loans can help a borrower make an informed decision about his or her mortgage. Weighing all of the options available today can prove ultimately beneficial for those in the market for a mortgage.