Adjustable Rate Mortgage

An adjustable rate mortgage (ARM) is a loan that changes in accordance with an index. The index reflects the cost for the lender of borrowing in the credit markets. The lender may offer an ARM at a standard variable rate or set a rate higher than that. If you opt for an ARM, you can make payments up to 10 years in advance without penalty. This option offers many benefits, including avoiding higher monthly payments and incurring new closing costs.

Interest rates are difficult to predict

Compared to fixed-rate mortgages, adjustable-rate mortgages are more unpredictable, so it’s important to understand the risks of a new loan before making a final decision. Because the principal amount of the loan could increase instead of decrease, you need to be fully informed about current payments, the lender’s calculations, and potential offramps. When interest rates were high in the last recession, consumers rushed to secure the simplest and most affordable fixed-rate mortgages. Today, 30-year fixed mortgage interest rates are only 2.7%, so it’s important to understand what the lender’s calculations mean before signing.

Borrowers can prepay principal early without penalty

An adjustable rate mortgage allows borrowers to prepay the principle amount on their loan early without penalty. The benefits of early principal payments are that they reduce 주택담보대출 the overall cost of the loan and the total interest paid. Early payments do not shorten the term of the loan. Any principal that is paid early is applied to the remaining loan principal at a new, fully indexed interest rate. The amount of the prepayment is reported on the borrower’s paper statement.

The prepayment privilege is a privilege that lets you make additional payments or a lump sum payment toward the principle. This privilege varies by lender. Different lenders grant prepayment privileges at different percentages of the original amount of the loan. Generally, these limits are applied to the current year and cannot be accumulated. Depending on the lender, this privilege may be available only during the last year of the loan.

Borrowers can avoid higher monthly payments

ARMs are available in fixed-rate and adjustable-rate versions. ARMs can be set to adjust once a year, every six months or once every ten years. Generally, ARMs increase by no more than two percentage points. However, borrowers should be cautious and refinance their mortgages before the rate adjusts. If this is not possible, borrowers should prepare to make higher monthly payments for the remainder of the repayment period.

Although an ARM may offer a low introductory period in which you only pay interest, you will face an increase in payment when you’re required to pay off principal. This can result in negative amortization, where your payments do not cover the interest on the loan. Moreover, the amount owed increases when the index rate rises. This can result in foreclosure. A borrowers’ mortgage may become underwater if the payments cannot keep up with the rising interest rates.

Borrowers can avoid new closing costs

Among the benefits of an adjustable rate mortgage is the elimination of new closing costs. New borrowers who wish to avoid paying for new mortgage refinancing costs will benefit from the lower initial interest rates that are available with an ARM. These mortgages also don’t require refinancing fees and may even qualify for lower interest rates and payments than a traditional fixed rate mortgage. But if you are worried that your payments will be raised every time your loan adjusts, you should consult with a qualified lender and housing counseling agency.