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Understanding an Adjustable Rate Mortgage |
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An adjustable rate mortgage (ARM) is exactly what the name
implies; a home mortgage loan with an interest rate that is
adjusted during the life of the loan.
If you go out looking for an adjustable rate mortgage, the
lender will usually have two identifying numbers associated with
the loan offer; such as 1/1, 3/1, 5/1, 2/28, or 3/27. These are
some common numbers associated with adjustable rate mortgages,
but there are others as well. The first number indicates the
number of years that the adjustable rate mortgage will operate
like a fixed rate mortgage until it comes up for its first
interest rate review. The second number indicates the interval
at which the mortgage will be reviewed thereafter. For example a
5/1 ARM means that the interest rate given at the time of
securing the loan is guaranteed for the first five years of the
mortgage, and then the rate will be reviewed and adjusted in one
year intervals. However, a 2/28 means the initial rate is fixed
for 2 years and then the loan adjusts for the remaining 28 year
term. In this situation, the adjustment period may be once a
year or even every six months.
When seeking a home mortgage, you will have a choice of
adjustable rate mortgage, like we described above, or a fixed
rate mortgage. Unlike an adjustable mortgage, a fixed rate
mortgage will remain at the same interest rate for the entire
life of the loan.
Before choosing an adjustable rate mortgage, it is important to
understand that they have both |
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advantages and disadvantages and
the choice of which type of mortgage is best for you will be
largely determined by the current market as well as your own
situation. Advantages of Choosing an Adjustable Rate
Mortgage
By far, the greatest advantage of an adjustable rate mortgage is
that it usually begins at a lower initial interest rate than a
fixed rate mortgage loan. Because the mortgage lender does not
have to guarantee the interest rate for the entire life of the
loan, he is freer to offer the lowest possible interest rate.
Therefore, if you do not intend to hold your mortgage for more
than a few years, it might be worthwhile to choose an adjustable
rate mortgage and get the lowest rate possible.
There is a caveat to this situation. In an unusual market
condition called an inverted yield curve, the longer term
interest rates may be lower than short term rates. Normally the
yield curve is steep but in times of economic uncertainty, the
curve may flatten or even invert. This is normally a rare
circumstance but the curve is very flat in 2005.
There is another advantage to an adjustable rate mortgage, but
it is present only in a high interest rate market. If you are
securing a mortgage during a time when the mortgage rate being
offered is high, by choosing a fixed rate mortgage you would be
locked to that high rate for the entire life of the loan. If you
choose an adjustable rate mortgage; however, when the market
declines, your mortgage rate will decline |
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Untitled Document
Sorting a mortgage out can be stressful, especially if you have a poor credit history. This article provides some useful advice
You have to shop around for a good internet rate whether it be fixed or adjustable (variable).
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