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Adjustable Rate MortgagesAdjustable rate mortgages (ARMs) have been becoming increasingly popular in recent years.Unlike fixed rate mortgages, the interest rate for ARMs varies along with the current market interest rate. This means that not only does the interest rate vary but so does your monthly payment. Your monthly payment could change either down or upwards making you better or worse off. Before your take out this kind of loan, you should be aware of the risk that your monthly payments may well rise in the years to come. Advantages of ARMsTo counterbalance the additional risks associated with adjustable rate mortgages, there are a number of advantages to taking out an ARM. Firstly, the initial interest rate is often a substantial amount lower than the equivalent fixed rate mortgage. This makes your monthly payments lower in the earliest years of your mortgage - often when money is at its tightest.Also, you may have seen ARMs referred to as 3/1 ARMs, 5/1 ARMs etc. This means that these lower interest rates are actually fixed for the first part of the loan. For example, with a 3/1 ARM, the initial interest rate is fixed for the first 3 years of the loan; for a 5/1 ARM it is fixed for 5 years etc. This gives the combined advantages of the lower initial interest rate with the security of knowing your payments for the first few years. Some Adjustable rate mortgages may also offer a cap to the interest rate. This means that even if the market interest rate increases substantially, you have the peace of mind knowing that there is a limit to the increase in your monthly payments. Getting the best rateThe rate quote that you receive will depend to a large extent on your credit history. If you are looking for a low interest rate it can be worth spending the time going over your credit report and trying to improve your credit score. If you are unsure about your credit, check out our Credit Report Agencies page. Many providers now offer a free credit check so you can see how you stand with regards to getting the best interest rate possible.SummaryTo sumarise, ARMs may offer several benefits, but they also entail slightly increased risk. They can be particularly suited to those wishing to pay off their mortgage early or those not planning to to stay in their house for too many years, as these people can benefit from the lower fixed period at the beginning of the loan without going into the more risky adjustable part of the loan.Next: Closing Costs Or, get an Adjustable Rate Mortgage quote now from ING DIRECT |
