Let’s clear the air: Adjustable rate mortgage loan is not bad. Yes, they’ve gotten a “bad rap” over the last year because people tend to associate adjustable rate mortgages with recent housing woes plaguing the nation but the loans are not the cause of the nation’s real estate crisis; misunderstanding and misusing them is. The reality is that adjustable rate mortgages can, in fact, be an excellent mortgage option IF you fully understand how they work. So, with that said, it’s time to learn.
Who is eligible for an adjustable rate mortgage? As with any mortgage loan, anyone can apply. However, adjustable rate mortgages do tend to be more appealing to those who deal with budgeting changes well and those who don’t plan on living in a specific house for more than three to five years. Why? Keep reading…
What exactly is an adjustable rate mortgage? An adjustable rate mortgage is one of the two most popular mortgage loan types offered. As the name suggests, the mortgage loans are called adjustable because the rate of the mortgage loan changes periodically—most commonly every six months. Mortgage loan firms often abbreviate “adjustable rate mortgage” with “ARM.”
How do adjustable rate mortgages work? The process for obtaining an adjustable rate mortgage is the same as any other loan type. You must apply for a mortgage loan and then, based on your credit standing, a mortgage loan officer will process your information to determine which lenders are willing to fund your mortgage. In most cases, loan officers will present you with multiple home loan options—ARM and fixed-rate mortgages.
Why do people choose the adjustable rate mortgage type? The simple answer: The numbers associated with ARMS always look great! In fact, they’re nearly too good to be true…but they are true. The interest rates are low and the monthly mortgage payments are manageable for a much larger percentage of the population than fixed rate loans.
In the end, the key to determining which type of loan is best—fixed or adjustable—is about mathematics and lifestyle. If you’re on a limited budget but expect your income to increase substantially in each of the upcoming years, an adjustable rate mortgage may be the best option for getting you into a home sooner rather than later. However, if you’re uncertain about if or how your income will fluctuate, it’s best to play it safe and opt for a fixed rate loan. That way, your mortgage payment won’t be a surprise, regardless of what the economy is doing. Of course, if you base your home mortgage loan choice on a mortgage payment that you can afford comfortably based on your current financial situation versus trying to “figure out how to make things work,” either type of loan will have you in your dream home in no time.