Adjustable Rate Mortgage Loans

Adjustable rate mortgage loans are one of the many options that potential homeowners will have staring at them when a mortgage broker or lender puts all the choices down on paper and pushes it across the desk. It is the loan of the optimist, the glass half full person that is sold on things always getting better. It's also for the person that has fallen in love with a house that is a little too much money for a traditional fixed rate loan. But because of the low introductory interest costs of adjustable rate mortgage loans at the moment, the owner can make that two story work instead of that ranch which is just too small for two people. Stretched out before any home buyer are a plethora of choices, and there are pros and cons to every option, so each one should be compared to the ARM under discussion at this lens.

In reality, there are really only two main types of mortgage loans, fixed and adjustable. All the rest are hybrids of these two. Each has a very specific function in the mortgage lending world and provides borrowers some very helpful features to meet almost anyone's financial situation. But the almost universal advice from experts in the lending field suggests that a person get pre-qualified for a loan before looking for a house. A borrower can then concentrate all his time on houses that are in line with one's budget and ability to pay. There have been many disappointed persons who have fallen in love with a house only to discover that adjustable rate mortgage loans were not possible on their income. And in times of economic upheaval, the prevailing rules for borrowing get thrown out the window in favor of more stringent qualifications, so a qualification in better times does not necessarily translate into an approval in choppy waters.

If there were a matriarch of mortgage loans, a Rose Kennedy of the banking industry, it would have to be the centuries-old fixed rate mortgage. When a person slips into one of these Sherman Tank agreements, there are never any questions about the future. The payment is going to be the same month after boring month for either three hundred and sixty or one hundred and eighty months. Earthquakes, recession or depression, record low interest rates or cirrus cloud, jump off the building high rates, none of it makes any difference to the fixed rate loan. If the fixed rate loan were a car on the road today, it would be a '97 Century or Taurus, still plugging away mile after mile, year after year. Not pretty, certainly not exciting, but dependable, yes. If you can say with the Psalmist these words, you will be forever blessed: "As the hart (deer) panteth after the water brooks, so panteth my soul after thee, O God, my soul thirsteth for God, the living God..." (Psalm 42:1-2)

But hold on the boring mortgage loan talk is over. Strap oneself into one of the Pocket Rockets of the lending world, adjustable rate mortgage loans. If a person wants excitement like riding a four hundred foot high coaster while the bugs hit your front teeth, and if the Federal Reserve report every quarter does not create palpitations, then grab yourself the Ferrari of lending, adjustable rate mortgage loans. Actually these are Ferraris with a governor on them so that they don't go so fast as to create a heart attack. Here is how they work.

Adjustable rate mortgage loans are based on the prevailing interest rate, usually on an index rate published in the Wall Street Journal on a particular day of the calendar. One ARM is not necessarily the same as another ARM. Indexes, caps, margins, discounts, negative amortization payment options and recasting are all terms a person should know so that an accurate comparison between lending agreements can be made. An ARM does have a cap on the loan meaning that it cannot raise more than a certain amount of points in a year, and cannot rise above a certain ceiling ever. So the best thing to do is always play the worst case scenario on paper to see that this all means. If the cap is two points a year, how much will the monthly payment rise and if things really get bad and there is a rise over four years to the ceiling how much will the payment be are both "what ifs" that needs to be explored.

So here are the nuts and bolts of this whole issue. First the length of stay in the house is a key deciding factor in whether it will be a fixed or one of the adjustable rate mortgage loans. The longer a person plans to remain in a house, the more sweet a fixed rate looks, but if a person lives through a twenty year low interest era, a lot more money will be paid for the house versus one of the adjustable rate mortgage loans. The issue of whether or not a person's income will be going up in the next few years might motivate to take a chance on being able to pay a rising ARM loan. Included also in the discussion will be other large purchases such as a car, college expenses or other big ticket items may affect how much money a homeowner may have for mortgage payments later. Head spinning? The real issue is, do you feel lucky; well, do 'ya, homeowner?