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?
Adjustable Rate Home LoansAdjustable rate home loans are available for qualified borrowers and can provide a real alternative to the traditional fixed interest loans that have dominated the mortgage industry for so many decades. ARMs are the answer to the dilemma of wanting more house than the fixed rate loans can provide and can make seemingly out of the question home purchases a reality. There are many types of ARMs available, and some have features that require very careful consideration before purchasing. They almost always have introductory rates that lending institutions offer as a teaser , and go up after the first year, and although not dramatically in interest , the homeowner will see a difference in his monthly payment. The fixed rate loan could be compared to a traditional tweed jacket with elbow patches that reeks of conformity and steadiness. The adjustable rate loans are more like clothes fresh from the designer houses of New York; hip, trendy and very much the product of the fashion winds that blow.
An ARM is based on an index which guides the rise and fall of interest rates. Adjustable rate home loans do have the very tenuous characteristic of being able to rise from month to month in terms of loan repayment. While the actual amount of the loan remains the same, the amount of the monthly payment can rise because interest rates have inched up. On very large loans for example, an eighth of a point rise in house loan interest rates could raise the next month's payment by fifty dollars. Not such a horrible thing, but if they rise every month at the same rate, it could make a five hundred dollar difference in a house payment in a year. If this isn't frightening enough, there are usually two percent caps on yearly interest increases, which could make that payment, well, you figure it out. On top of that already a disaster scenario, the highest cap an ARM can go is often seven or eight full points above the original introductory number. Guess who would be moving out of that house if such a thing would happen!
And consider this awful possibility. Suppose a person gets one of the adjustable rate home loans available and the rates begin to rise. By the seventh month of the year, the interest rates have reached their cap under the stipulations of the lending agreement. So the monthly payment is now at the highest level it will be for the remaining five months of the year. If you think that is good news, think again. For the next five months, the loan begins what is called negative amortization. This means that during those five months assuming that the interest numbers keep rising, the interest not being paid because of the cap is now being put on principle. If things stay that way, a faithful mortgage payment schedule would still mean a person owes more money on the house than at the beginning of the loan. OUCH!
Adjustable rate home loans are not any more hard or easy to obtain than a fixed rate lending agreement. Some things ought to be considered however before landing on this type of agreement and settling in for the long haul. If a person is going to stay in a house for a long time, best go with a fixed numbered loan. A few years' stay and the advice would be to jump on adjustable rate mortgage loans and ride them to the end. If a person thinks they are going to get an income boost in the future, adjustable rate home loans might be an okay decision. But if college expenses or a new car purchase or some other large ticket items are still to be made, how will they fit in the budget if interest rates rise and begin the big squeeze. Whether the reader is aware of it or not, there is an increasing media bias against all things having to do with Jesus Christ and His followers. Jesus said this would happen when He declared: "If ye were of the world, the world would love his own; but because ye are not of the world, but I have chosen you out of the world, therefore the world hateth you." (John 15:19)
Not all adjustable rate home loans are the same. For example there are fixed period ARMs which allow the owner to enjoy a fixed interest schedule for a selected period of years, such as three, five or ten. At the end of the selected period, the interest schedule reverts to the adjustable rate of the one year treasury securities index at the time. Fannie Mae and Freddie Mac have offered their own two and three year versions of these fixed period ARMs to those who have had recent bankruptcies or other financial problems. Convertible adjustable rate home loans allow the homeowner, usually within five years after closing, to convert to a fixed rate loan if desired.
The bottom line is to always look around and see what's going on. If the economy is swinging and the interest rates are down and the GNP is up and there doesn't seem to be anything on the international horizon and one's job is secure and the weather is good...okay, there's no way to really read the tea leaves. So instead, use good sense. Adjustable rate home loans can put a person in that dream house. Will it be worth the possible worry?