Adjustable rate mortgages (ARMs) were a popular home loan choice prior to the real estate bubble bursting circa 2007. The mortgage option comprised nearly 70 percent of all financing options during the real estate boom and the alternative nearly vanished after the mortgage meltdown struck the nation's housing industry (Money.cnn.com). Now, ARMs are back and growing in market share.
What Is An ARM
An ARM is a type of loan that allows the lender to adjust the interest rate during the loan terms. The product starts off providing consumers with a fixed rate of interest for a limited period of time. Once that time elapses, rate changes are based on the market conditions coinciding with the adjustment date. While the rates can either increase or decrease during the loan terms there is a rate change cap and a lifetime cap limiting how much interest can be charged on the home mortgage agreement.
While some consumers favor the stability provided by a fixed rate mortgage, other mortgage seekers are enticed by the attractive interest rates provided by ARMs. Typically, ARMs offer lower interest rates than the fixed rate mortgage products. According to Mortgage Marvel's Mortgage Rate Trend from the February 15, 2011 summary report, the current rate for a 5/1 fully amortization ARM is 4.25 percent. Compared to the 5.19 percent charge for a fixed rate mortgage, the difference is a dramatic 0.94 percent and that can result in thousands of dollars in mortgage savings, as the lower interest rate will be valid for the first five years of the financial obligation. After that time period, the rate will adjust annually.
Risks Associated With ARM
The substantial upfront savings potential of adjustable rate mortgages may be incredibly enticing, but the homeloan is not without its risks. Since an ARM is not fixed, there is chance that long-term interest will go up and raise the ARM payments to uncomfortable levels. Additionally, homebuyers may not see their home values appreciate, the house could become devalued and a consumer can end up underwater on their mortgage. These risks can increase the odds of a mortgage holder entering default and losing their home to foreclosure.
Consumers who are poised to manage the risks associated with an adjustable rate mortgage need to have a responsibility of conducting their due diligence in regards to the home loan selection process. Contracting for an adjustable rate mortgage may be a great option for homebuyers who plan on living in their property for seven to eight years as in relation to a 5/1 ARM that will provide consumers with substantial savings for five years. If after that time period, rates take an upwards spike, a homeowner may have to immediately pay more, but will have many months until all the savings are spent on the higher mortgage rate.
Adjustable Rate Mortgage Trends
Presently, 5 percent of all new mortgage originations are comprised of adjustable rate mortgages (Money.cnn.com). Mortgage behemoth Freddie Mac has predicted that number to increase to 10 percent by December 2011. The increased activity in the ARM sector is being attributed to 30-year mortgage rates trending upward and exceeding the 5 percent mark. Compared to those rates, the current ARM opportunities are great deals.
Consumers looking to take advantage of the amazing interest rate bargains provided by adjustable rate mortgages can count on Mortgage Marvel to deliver. Mortgage Marvel is the industry's premiere mortgage rates origination tool that will directly connect mortgage seekers with the accurate and up-to-date rates and fee information needed, all without requiring any personal information. Once a consumer finds a rate opportunity crunching the numbers on an ARM vs. Fixed Rate a mortgage calculator will allow individuals to determine if an adjustable rate mortgage or a fixed rate mortgage works better with their financial situation.
