Mortgage Financing and Adjustable Rate Mortgages

By: Mike Hamel

Adjustable rate mortgages (ARMs) have been a popular form of mortgage financing in recent years. These mortgages start out at low rates for a set period; then adjust along with the index to which they are tied. As interest rates go up, so do the monthly payments.

The index to which the interest rate is tied varies from lender to lender. The most common indexes are the rates on one, three, or five-year Treasury securities. Another favorite is the average cost of funds to savings and loan associations. To the index rate, the lender adds a few percentage points called the “margin."

The main attraction - The main attraction of adjustable rate mortgage financing is that it is initially cheaper than fixed rate financing for the same size mortgage.

Not only does this mean lower monthly payments to start with, it means borrowers can qualify for larger loan amounts. That’s because lenders sometimes decide whether to make a mortgage based on the ratio of current income to monthly payment.

The main drawback - The trade-off for low initial rates is the risk of rates going higher in the future—much higher. Many borrowers who run into this problem have to refinance, as Frank Nothaft, Freddie Mac’s chief economist points out. “But the wide proliferation of adjustable-rate mortgages originated in the past few years that are nearing their first interest-rate adjustment provides borrowers an incentive to refinance into a lower-cost ARM or fixed-rate mortgage."

Right for you? - Adjustable rate mortgage financing make sense for borrowers who cannot qualify for a fixed rate mortgage large enough for the house they want to purchase, or for those whose income is likely to rise enough to cover higher payments in the future. It would not be a good move for those who might move in the next few years.

Learn more about your options by visiting . The site also offers free mortgage quotes at today’s most competitive rates.

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