ARM mortgage loans offer a homeowner a variable rate of interest that moves in accordance with the lender's preferred index once the fixed term concludes. This means that home mortgage payments can and will change in accordance with market conditions. Whilst getting the best fixed rate mortgage deal has proven more popular in recent years, an Adjustable Rate Mortgage loan can still benefit borrowers.
ARM Mortgage Loan Indexes
The ARM mortgage rate moves in-line with a specific financial index. The most popular indexes for ARM's are the London Interbank Offered Rate (LIBOR), Cost of Funds Index (COFI) and the one-year constant maturity treasury securities (CMT). There will be a cap on how much interest rates can rise by over the life of the loan so it is important to determine whether this would still be affordable.
Lower Home Mortgage Payments
ARM mortgage rates will initially be lower than on a 15-year fixed rate mortgage because the lender doesn't need to assess the risk of rate changes. This means that home mortgage payments will be more affordable over the short to medium term. Whilst rates are likely to rise over the longer term, this can help a first-time buyer with genuine career prospects afford a better home.
Falling ARM Mortgage Rates
When an economy is on-the-slide, the likelihood of an ARM index falling is a lot higher. An Adjustable Rate Mortgage loan can benefit the borrower considerably when interest rates are headed in a downward direction. If that borrower had entered the best fixed rate mortgage deal, rates would not move. This could mean that higher home mortgage payments are being paid.
Plan to Move Home
A 3/1 or 5/1 ARM mortgage loan can help a homeowner who plans to move after the fixed part of the loan concludes. The borrower benefits from a low fixed-rate for a 3, 5 or 7-year period and is then able to move home without paying an early redemption penalty. This means that home mortgage payments will be lower and less interest will be paid during the period before the borrower moves house. This could prove more difficult if tied-in to a 15 or 30-year deal.
An ARM mortgage loan is an excellent way of minimising the cost of buying a home in the short to medium term. This makes it a particularly good mortgage for those who plan to move home again at the end of the fixed term or are likely to experience income growth as their career progresses. The best fixed rate mortgage deal is likely to be a better option for those who are on fixed incomes. This is because rising ARM mortgage rates could lead to home foreclosure.
Sources
"LIBOR, other interest rate indexes." Bankrate.com.
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