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4 Important "W's" of the Adjustable Rate MortgageThe current mortgage meltdown in the United States has given the adjustable rate mortgage a black eye. Used properly, it can be a smart way to use money to your advantage. Here's the breakdown on the ARM and how and when to use it without hurting yourself.
What - The adjustable rate mortgage is a form of financing that has fallen out of favor as of late. Instead of getting an interest rate that stays the same throughout the life of the loan, the ARM adjusts - or changes - periodically depending on current market conditions. It can be adjusted upwards or downwards (usually on a quarterly basis) depending upon what direction the rate the loan is based upon moves.
If you get an ARM loan and interest rates go up, your payments can increase - sometimes dramatically. By the same token, if they fall, your payments will fall. Most lenders have a clause in your contract that sets a ceiling on how far or how fast your rate can increase. If you have bad credit, your lender may have a floor interest rate built in that says your interest rate will never drop below a certain level, regardless of how low interest rates get.
When - There's a time and a season for everything, and ARMs are the same way. If you have serious credit issues that you're trying to resolve, an adjustable rate mortgage just might get you an approval when everyone else is saying "no". At the same time, if you think you may be moving soon, it might make sense as well.
Who - The best time to consider the adjustable rate mortgage is if you have a lot of uncertainty or instability in your life. For instance, if there's a strong likelihood that your company will relocate you halfway across the country in a few months and you're planning on selling your home anyway, it could make good financial sense to utilize this strategy. It could free up cash for a move. If interest rates take a huge jump in a short period of time, it isn't likely to hurt you much because your loan will be paid off with the sale of your home.
Why - An ARM has less certainty than a fixed rate loan. If you want to save money and you can handle the risk that rates might jump dramatically upward, this might be a good strategy. However, I want to caution you that there is a lot of risk in taking this approach. If you can't afford to make dramatically higher payments if rates rise or your budget relies heavily on consistency, don't get an ARM.
As you can see, the adjustable rate mortgage doesn't come without some risk. But if you know the risks - and the rewards - going in, an ARM might be a sound financial decision. The best thing you can do is to sit down with a calculator and make some best and worst case budget calculations. If you're a risk taker and you can handle it, you could save a lot of money.
About the Author:
Darrin Roseborsky is a Refinance Specialist with OMAC Mortgages, seminar speaker and president of the Roseborsky Group and HomeRefinanceCoach.com. Darrin can help you MAXIMIZE your equity PROPERLY and help you choose options that make the MOST SENSE for your situation! Learn more about how it works at: www.homerefinancecoach.com