Arm mortgages are loans for the home that you can take out against your current home. These mortgages are different from conventional mortgages. You do not have to go through a traditional bank to get one of these mortgages. It can actually be done online. Just like any other type of mortgage it will usually have to be pre-approved for in order to qualify for one.
An ARM is a Variable Rate Mortgage, an adjustable-rate mortgage or tracker mortgage. An ARM is where the interest rate on your loan varies on an annual index that reflects the price to the lender of lending on the prime credit markets. Normally the loan can also be offered at the current standard variable interest rate. This means that if the index rises then so will your payments. In short you can have your payments set at whatever the market says is low enough to give you a profit. However there are some disadvantages to this type of mortgage.
One of the biggest disadvantages to adjustable rate mortgages is that they are usually only available to people who have excellent credit scores. This is good news for you because people with lower credit scores can have problems qualifying for them. Usually people with lower credit scores will have higher interest rates to begin with so they end up paying more for their mortgage in the long run. This can add up quickly especially if you have a lengthy amortization period.
This disadvantage to adjustable rate mortgages is one that is why you will see fewer ads for them. If you want to take advantage of lower interest rates now and save a lot of money over the life of your loan then you should seriously consider an ARM. You will also need to take note of the fact that they are only available to people with excellent credit scores. If you have poor credit, you will be able to qualify for a regular fixed-rate or a subprime adjustable rate mortgage. But you will likely pay much higher interest payments for the duration of your loan.
Another disadvantage to adjustable rate mortgages is that sometimes the lender will raise the interest rates in the initial period of the loan after which they drop back down to normal rates. The lender may raise the interest rates by one percent in the initial six months but then may only raise them by one percent in the final six months. While the initial phase can be very low risk for the homeowner, the lender has the right to raise the mortgage loan rates back to their original level at any time prior to the end of the initial period.
Adjustable rate mortgages come in many different types. There are two categories of ARM’s the ARM High-Amortized and the ARM Prime-Amortized. Both have similar payment requirements but the ARM High-Amortized mortgages have a longer initial period. Prime-Amortized ARM’s have shorter payment terms. Although most homebuyers select an adjustable rate mortgage as their mortgage of choice, some choose the ARM Mortgage rates because of tax advantages or the lower interest rates associated with them.
Many people who refinance their mortgage to purchase a home with an adjustable rate because of the low introductory rate offered by their lender. Lenders like these customers because they know that once the customer takes the payment plan back up, the monthly payment will go up anyway. When a customer is on the verge of securing a new job and needs to refinance their mortgage to purchase a new home, an introductory rate may allow them to do so. For those who qualify for the refinance program, the low introductory rate can be worth the short-term higher payment. It may also be worth it to refinance to a lower interest rate for the long term.
Another way that an ARM mortgage interest deduction can be utilized is if you use the equity in your home to pay down your mortgage. As mentioned previously, the ARM has its advantages. It can save you thousands of dollars over the life of the loan if you qualify. The only problem is that it can also cost you thousands of dollars over time. You will lose the ability to deduct interest, the closing costs related to the refinance, and you will have to pay closing costs if you use the cash from the mortgage rate increase to pay off your ARM.