Which Arm Is The Best One For You?

By Author: Scott F. Staudt
Total Articles: 91
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The descripton of an ARM is an Adjustable Rate Mortgage, which means the rate can change (adjust) over the life of the loan. This type of loan became necessary when interest rates became very volatile and lenders needed to protect themselves against this volatility.

This was not an issue until recent decades, since interest rates did not change as dramatically years ago.

Most ARMs are for thirty year mortgages, although lower periods are available. What is the main worry to borrowers is how often the rate is reset. If a borrower plans to live in his home for a considerable time, he should try to obtaina fixed rate mortgage since paying off an ARM means new closing costs, etc.

For anyone else, a 5 year adjustable rate mortgage is probably the best idea for most homeowners. You do not want to take a chance on an ARM that changes the interest rate more frequently. For example, if your mortgage rate is 6%, it will remain at 6% for five years, even if market rates increase to 8% over these five years.

Those who had an ARM that adjusted annually would have had to take each of the increases on the way ...
... to 8%. Most ARMS have an interest rate cap, however, to guard the borrower from runaway interest rates as well.

The length of time you believe you will live in your home is the best gage for the adjustment terms of your loan. If you plan on being in a home for only four or five years, the initial rate of an ARM is the only rate that matters to you. If you will live there for 10 or more years, you have to be concerned about the adjustments at each reset period. However, reset periods of over 5 years are not common.

You can obtain an ARM that is based on different interest rate instruments such as the LIBOR or Treasury Bills or Notes. Each of these has advantages and disadvantages, depending on the situation of the homeowner. Keep in mind that any ARM with a frequent adjustment period will affect your monthly payment frequently.

Borrowers interested in maintaining steady mortgage payments for budget purposes will be more likely to opt for ARMs that do not adjust too frequently.
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