What are ARM Home Loans? An ARM loan is a mortgage loan with an interest rate that periodically is adjusted based on an index. With ARM home loans the interest rate goes up and down each year according to a set formula, or “index”. The interest rate also includes a margin, a fixed percentage that never changes over the life of the loan. With ARMS the interest rate usually starts low in the first year and then starts to inch up year after year. Adjustments to your interest rate are made at fixed time periods. When it comes down to it there are basically two types of loans. The fixed rate loan and adjustable rate mortgage, also known as ARM mortgage Loans. There have been many debates on which one is better. They both have benefits and faults and it really comes down to your unique situation. (Quick Tip: Avoid arms that adjust monthly they are not a good choice for the buyer!)
Most arms have an upper limit or cap which protects the borrower by limiting how much your interest rate and monthly payment can increase over the term of the loan. As a borrower it is never recommended to get an ARM loan that adjusts every month. Also you want to make sure if you do sign up for an ARM loan that it has a cap.
As a borrower you want to shop carefully for ARM loans. ARMs can be very beneficial if interest rates are falling and you are only planning to stay in your home for a short period of time like 5 to 10 years. Make sure you understand what you are getting into. Never get talked into something you don’t fully understand.
ARM Home Loans May Stretch Your Buying Power
If you are looking to borrower more money than you can get with a conventional loan an ARM loan might be of interest to you.
- ARM Loans allow buyers to obtain larger loans than possible with fixed rate financing.
- Rather than stopping at 30 years, some ARM Loans offer terms as long as 40 years.
- ARM Loans are usually assumable by a new buyer at current interest rates unlike conventional loans.
- ARM Loans generally encourage prepayments without penalties which can result in lower monthly costs.
- Even in the worst case scenario, when your ARM goes up the maximum percentage ate each readjustment period, you’ll often still pay less than you would with fixed rate financing at least during in the first five years of the loan.
- An ARM loan with a conversion clause allows you to switch to a fixed rate loan an especially attractive option if interest rates are on their way down.