ARMs - Types and Advantages
If you want to apply for a mortgage loan, instead of the conventional fixed-rate mortgage, you can opt for adjustable-rate mortgage (ARMs).
Here, the interest rate fluctuates, according to the market index, so, the monthly payment amount also changes.
Types of ARMs The three main types of ARMs are: Hybrid ARMs: In this type, for an initial period of time, the interest rate remains constant and then floats subsequently.
It has mixed characteristics of both ARMs and fixed-rate.
Hybrid ARMs are very popular in the recent years.
Option ARMs: It is a typical 30-year ARM, which initially offers the borrower four monthly payment options, namely, an interest-only payment, a specified minimum payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment.
Cash flow ARMs: It is a minimum payment option mortgage loan.
It allows the borrower to choose their monthly payment from several options.
These payment options include the option to pay at the 15 year level, 30 year level, interest-only level and a minimum payment level.
But, this type of loan can result in negative amortization.
Advantages of adjustable-rate mortgage The benefits of taking an adjustable-rate mortgage are: The biggest benefit of ARMs is the interest rate, which can be significantly lower than a 30-year fixed-rate mortgage.
Some ARMs have a convertible feature, so, a borrower can convert the ARM to a fixed-rate mortgage.
The consumers mainly select the ARMs when they know they will remain in the home for only three or fewer years.
Sometimes, homeowners use the ARM when they need to qualify for larger amounts.
Rarely, it may happen that ARMs rates decrease in declining interest rate and thus your loan payment becomes even less.
Adjustable-rate mortgages are mostly sold to those consumers who are not likely to be able to pay off the loan, if there is a rise in interest-rate in the market.
So, to protect against interest rate rises, one should specify some points in the loan document, like, a maximum (cap) that interest rates can rise in any year and a maximum (cap) that interest rates can rise over the life of the mortgage.
Here, the interest rate fluctuates, according to the market index, so, the monthly payment amount also changes.
Types of ARMs The three main types of ARMs are: Hybrid ARMs: In this type, for an initial period of time, the interest rate remains constant and then floats subsequently.
It has mixed characteristics of both ARMs and fixed-rate.
Hybrid ARMs are very popular in the recent years.
Option ARMs: It is a typical 30-year ARM, which initially offers the borrower four monthly payment options, namely, an interest-only payment, a specified minimum payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment.
Cash flow ARMs: It is a minimum payment option mortgage loan.
It allows the borrower to choose their monthly payment from several options.
These payment options include the option to pay at the 15 year level, 30 year level, interest-only level and a minimum payment level.
But, this type of loan can result in negative amortization.
Advantages of adjustable-rate mortgage The benefits of taking an adjustable-rate mortgage are: The biggest benefit of ARMs is the interest rate, which can be significantly lower than a 30-year fixed-rate mortgage.
Some ARMs have a convertible feature, so, a borrower can convert the ARM to a fixed-rate mortgage.
The consumers mainly select the ARMs when they know they will remain in the home for only three or fewer years.
Sometimes, homeowners use the ARM when they need to qualify for larger amounts.
Rarely, it may happen that ARMs rates decrease in declining interest rate and thus your loan payment becomes even less.
Adjustable-rate mortgages are mostly sold to those consumers who are not likely to be able to pay off the loan, if there is a rise in interest-rate in the market.
So, to protect against interest rate rises, one should specify some points in the loan document, like, a maximum (cap) that interest rates can rise in any year and a maximum (cap) that interest rates can rise over the life of the mortgage.
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