ARM Loans – Understanding How Adjustable Rate Mortgages Work and If You Should Use One

ARM loans were a very popular way to purchase a home and refinance a mortgage throughout the previous real estate craze. However to everyone’s surprise these loans became one of the major sources of problems for many home owners across the world. Something no one ever thought would happen when the times were good and everything was OK with the economy and the housing market!

How Do These Loans Work?

An Adjustable rate mortgage is a home loan that gives borrowers a lower then normal interest rate for a short time period, normally one to seven years. After the initial period expires the loans interest rate will start to adjust, and 99% of the time the interest rate and therefore your payment will increase!

How Is The New Rate Established?

Many people are not sure how there new rates will be figured out once the fixed rate period passes. This can be determined by looking at your loan paper work and finding the loans margin and the index of your loan. You will then add the margin to the index to get the new rate.

How High Can My Reset Rate Go?

Keep in mind though that there are safety nets in place for borrowers and your loan can only jump about 1-2% each time the loan adjusts. Plus there is a maximum rate the loan can hit as well. These are listed in the paperwork and are referred to as your loan caps.

Should I Use a Variable Rate Mortgage Loan?

Generally these loans should be avoided by most people because of the risk that comes with them. However if you are certain that you will be refinancing or moving before the fixed rate expires then an adjustable rate home loan might be a good choice for you. But if you really look at the numbers the little bit you save by taking an ARM and refinancing it within a few years you would most likely be better off sticking to the tried and true fixed rate mortgage.

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