If you are considering or have already used an Adjustable Rate Mortgage (ARM) to finance your home, you need to understand the risks inherent to this type of mortgage. Here is what you need to know about Adjustable Rate Mortgages. Adjustable Rate Mortgages are attractive to homeowners for a variety of reason. Low interest rates and low monthly payments compared to traditional, fixed rate mortgages are at the top of the list. Many ARM loans come with introductory rates that save you cash during the introductory period. There is a dark side to these mortgages, a dark side that could wreck your monthly budget and even cost you your home. The problem with Adjustable Rate Mortgages is that when the introductory period ends, your mortgage lender will adjust the interest rate at regularly scheduled intervals. The interest rate you receive after an adjustment is tied to some financial index, plus the lender will add a premium markup to this index. When all is said and done your monthly payment will be adjusted according to this new interest rate. The Federal Reserve has made a habit of raising short-term interest rates for the last several years. What does this mean for mortgage interest rates? When the Fed raises short term rates that Adjustable Rate Mortgages are tied to, your mortgage interest rate and your monthly payment are destined to go up along with it. Why does the Fed raise short term interest rates? The Government believes that by raising short term interest rates the economy will slow down and offset inflation. This is done at your expense of course. When interest rates rise too quickly your monthly payment could stretch the limits of your monthly budget; this is the risk involved with Adjustable Rate Mortgage loans. Adjustable Rate Mortgages come in different flavors with different levels of risk. These loans range from a standard Adjustable Rate Mortgage, to Interest Only Adjustable Rate Mortgages, to the ultra-risky Option Adjustable Rate Mortgages. To learn more about these risky mortgage loans, register for a free mortgage guidebook. |
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