Mortgage: Types of Adjustable Rate Mortgages
Adjustable rate mortgages (ARM) are an option for homeowners who have an adjustable-rate mortgage and wish to lower their monthly payment amounts. When considering an ARM, there are several things to consider before making a purchase. First, these mortgages come with variable interest rates. Interest rates can change at any time, which makes the payment amount go up and down. Second, when you refinance your ARM, the terms of the refinancing will affect the amount that you are left with to pay each month. Third, when you refinance an ARM, the lender has the right to change or reduce any aspect of the loan, including the APR (annual percentage rate).
The first thing to consider when refinancing an ARM is what the interest rate will be when the mortgage is closed. To find out what the new interest rate will be when your refinance is finalized, contact your lender immediately. The key to finding this out is to understand the type of ARM you have. There are four types of ARM: non-recourse, recourse, negative amortization and option ARM. Understanding each type of ARM will help you determine how you should approach the adjustments to your payments after the transaction closes.
Non-recourse ARM mortgages have only the interest left on the loan when it is paid off. As long as the borrower pays off the mortgage within five years, the lender will not pursue collection of the remaining balance. This type of ARM mortgage rates will vary greatly, with some going as high as fifteen percent and others as low as five percent. Due to this incentive to borrowers, non-recourse loans often have adjustable rates that will go up after five years.
Refinance ARM mortgages have an introductory period which allows the borrower to lock in the interest rate. During this period, the monthly mortgage payment will remain the same through the first seven years of the loan. After the introductory period, the interest rates begin to gradually go down. Generally, these initial seven-year terms require borrowers to make a premium payment in order to lock in their interest rate. Once the payment is made, the borrower retains the initial seven-year term, plus the subsequent seven years of compound interest.
Homebuyers with poor credit can still obtain good adjustable arm mortgage rates. Borrowers with bad credit will pay higher interest rates because their loans are considered high risk. However, they do not have to worry about having bad credit affects their ability to purchase a new home. Two other factors that influence homebuyers interest rates are down payments and closing costs. While borrowers who make larger down payments will pay lower mortgage rates, borrowers who make smaller payments will have larger closing costs. To compensate for these factors, many lenders offer no down payment programs to borrowers who agree to a smaller down payment.
Adjustable rate mortgages (ARM) are different from fixed rate mortgages (FRM) in that ARM mortgages allow for flexible payment terms and interest rates. With an ARM mortgage, borrowers are not locked into a specific interest rate; rather, they can choose from several loan interest rates during the initial interest-rate term. The initial six-month interest-rate term is the most flexible of any ARM mortgage. For this reason, buyers with good credit can get great loan rates by choosing to exercise their option to extend the six-month term.
Fixed-rate ARM mortgages come in a variety of types including balloon, adjustable-rate, direct adjustable-rate and interest-only adjustable-rate mortgage rates. As mentioned above, fixed-rate ARM mortgage rates generally come with shorter terms. These terms allow borrowers to lock in at the lowest interest rate for a six month term. For buyers with poor credit, adjustable arm mortgage rates can also provide good loan deals. These mortgages were recently introduced by the Federal Reserve in order to stimulate the economy and help buyers and homeowners that may be struggling with high debt and falling home values.
Homebuyers can take advantage of the introductory offers of an ARM mortgage to purchase a house at a better price. However, before purchasing an ARM mortgage, buyers should be sure to shop around. Find out the minimum amount that you will be required to borrow, and be sure to find out the repayment terms and any fees associated with the loan. The first monthly payment on an ARM mortgage may be slightly higher than the final payment on a standard mortgage, but over the course of the introductory period, the monthly payments can be reduced significantly. To learn more about buying a home with an ARM mortgage, register for a free mortgage guidebook.