It can be confusing to understand the benefits and potential risks in any type of mortgage loan. Unfortunately, some lenders are focused on promoting one particular type of loan that may not be ideal for all borrowers.
The key factor for any home buyer is to consider the different loan options and to make a choice as to which option is best. For many buyers, an adjustable rate mortgage loan, also known as an ARM, may be the best option.
An adjustable rate mortgage loan allows the interest rate on the mortgage to change as the interest rates in the market change based on a specific index. This is ideal for the homeowner when rates are falling, and payments decrease, but it can also work the other way with higher payments as interest rates move up.
Typically, the interest rates on an ARM are favorable for the customer when compared to a fixed rate loan. This is because the bank doesn’t have the risk should the interest rates suddenly increase, and they are stuck with a mortgage at a lower rate over the entire 15 or 30 year fixed rate term.
What to Look For
The good news for home buyers is that there are options in adjustable rate mortgage loan that provide limits as to how much or how fast the interest rates on the ARM can change.
Caps are put on specific types of ARMs that limit the total amount that the interest rate can rise. By limiting the adjustment in the upwards direction, it is still possible to plan long-term for repayment of the mortgage. Some caps also limit the total monthly payment, which is also protection for the homeowner.
Additionally, some lenders may offer a block of time at the initial start of the loan before any adjustments can be made. This is great when interest rates are rising, but it can also work against the homeowner if they fall.
To learn more about the benefits of an adjustable rate mortgage loan and if it is right for your home purchase, talk to the professionals at Guaranteed Rate. Additional information can also be found at www.guaranteedrate.com.