How To Pick The Best Adjustable Rate Mortgage

By Author: Scott F. Staudt
Total Articles: 91
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The definition of an ARM is an Adjustable Rate Mortgage, which means the rate can change (adjust) over the term of the mortgage. As interest rates began skyrocketing in the seventies, lenders decide to protect themselves from this risk by setting interest rates more frequently.

In bygone days, this was not needed, since there was not such volatility in the movement of rates and lenders could lend at the same fixed rate for twenty or thirty years.

ARMs are for thirty years usually, with interest rates changing in the course of those thirty years. What is the main worry to borrowers is how frequently the rate is adjusted. If a homeowner plans to live in his home for a long time, he should try to obtaina fixed rate mortgage since paying off an ARM means new closing costs, etc.

The five year adjustable rate mortgage is usually the best type of ARM for borrowers. When the interest can be adjusted more frequently, the risk of spikes in the interest rate is higher. If your ARM is at 6% for five years, for example, it will not go up, even if rates increase to 8%, then back down to 7%.

Those who had an ...
... ARM that adjusted each year would have had to pay each of the increases on the way to 8%. Lenders realize that borrowers do want to protect themselves, however, so caps are usually a part of most ARMs.

The length of time you think you will live in your home is the best gage for the adjustment period of your mortgage. Those who normally live in a home for a few years really care about the first rate of the mortgage. If you think you will be in a home for six or seven years, try to negotiate a seven year adjustment. However, reset periods of more than 5 years are rare.

You can obtain an ARM that is based on different interest rate instruments for example the LIBOR or Treasury Bills or Notes. Each of these has advantages and disadvantages, depending on the outlook of the homeowner. If an ARM has a frequent adjustment period, of course your monthly payment will change more frequently.

For many homeowners, having a mortgage payment that can change frequently can be a real disaster in their financial plans!
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