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The Lowdown on Adjustable Rate Mortgages...

Adjustable Rate Mortgage (ARM)

You want to get a new home or a rental property in California, but the idea of paying an arm and a leg on interest is overwhelming. You can avoid that problem with an adjustable rate, or ARM, mortgage. This is every unique type of mortgage. It allows you to get an introductory interest rate that is much lower than a traditional mortgage.
You’ve probably heard of an adjustable rate mortgage before, but how much do you really know? There is quite a bit that goes into one of these mortgages. The more you know, the easier it will be to decide if this is the right option for you.

ARM Mortgages – The Nitty Gritty

First, you need to look at how an adjustable rate mortgage works. You can tell a lot by the name of the mortgage. The rate actually adjusts during the term of the mortgage.

That’s a simple explanation, though. If you want to understand an ARM, you have to look closer.

First, you need to understand your options. You can get a variety of loan options if you go with an ARM, with the most common being the 3/1, 5/1, 7/1, and 10/1. That might look like gibberish, but it gives you a lot of insight into the type of loan you are receiving.

The first number refers to the amount of time that your interest rate will be fixed. If you have a 3/1 mortgage, your interest rate will be fixed for the first three years, so it cannot change, no matter what happens to the market.

The second number refers to the number of times your interest rate can increase or decrease each year after the fixed period expires. In each of these examples, the second number was “1.” That means the interest rate can change one time per year for the remaining life of the mortgage.

In other words, if you have a 30-year 3/1 ARM, you will stick with your introductory interest rate for three years. Then, for the next 27 years, the rate can go up or down one time per year. That means you can make it through an unstable market without lots of ups and downs.

Still, the idea of your mortgage going up every year might sound a little scary. You do have some control, though, thanks to adjustable rate mortgage caps. These caps keep you in the driver’s seat, even if the market goes haywire.

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Adjustable Rate Mortgage Caps – What You Need to Know

You can keep control of your adjustable rate mortgage through a cap. You can set periodic, lifetime, and payment caps when you get your mortgage.

Periodic caps limit the amount that a rate can adjust over a predetermined period, while lifetime caps limit the amount the rate can adjust over the lifetime of the loan. Payment caps set a limit on how much the monthly payment can increase.

Once you set your cap, you never have to worry about your payment or rate going past a specific number. That means the bottom can drop out of the market, but you will be safe as long as you set your cap wisely. That takes a lot of stress off your shoulders.

Payment caps are a great way to keep your loan payments and interest rates within your budget, but they can come at a price. In some cases, payment caps cause negative amortization to occur. That happens when your loan payment fails to cover the interest that you owe. This will only happen if the interest rate balloons. If your rate can only go up or down once a year, you will have to wait until the next year for your rate to bounce back. That means you could theoretically end up making payments that don’t cover your interest for a year. Then, if the market adjusts itself, your payments will start catching up on the interest again. You can avoid this problem by choosing your payment cap wisely.

Breakdown – The Benefits and Drawbacks

If you’re on the fence on getting an adjustable rate mortgage, looking at the benefits and drawbacks can help. Check out the pros and cons so you can decide if you want to get an adjustable rate mortgage.

Benefits
• Low introductory rates
• Option to set caps
• Cheaper rates during the adjustment period when the market rates decrease

Drawbacks
• Rates can increase, depending on the market
• Payments increase when rates increase
• Payment caps can cause negative amortization

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Who Should Get an Adjustable Rate Mortgage?

Still not sure if you should get an adjustable rate mortgage? You can make it easier on yourself by understanding who gets these types of loans.

These loans are a good option for people who aren’t going to stay in a piece of property for long. You can get a low interest rate and then sell the property before the rates go up. For instance, if you get a 3/1, you don’t have to worry about a rate increase as long as you sell the home within three years.

It’s also a great option for people who plan to pay off their loans early. If you can pay your ARM before it adjusts, you will benefit from a very low interest loan. Then, you will own your property by the time your ARM is set to adjust.

Do You Qualify?

If you’re ready to take the next step, you need to determine if you qualify for an adjustable rate mortgage. Use our adjustable rate mortgage calculator to determine how much you can afford. Then, take our simple Adjustable Rate Mortgage Qualifier to see if you qualify for one of these loans.

If you qualify for an adjustable rate mortgage, we can help. With brokers and bankers onsite, we can handle every aspect of your loan. Let us find you the best rates and then get you the financing you need for your new home or investment property.

Why an ARM?

Most homeowners get into adjustable-rate mortgages for the lower initial payment, and then usually refinance the loan when the fixed period ends. At that time, the interest rate becomes variable, or adjustable, and the homeowner would likely refinance into another ARM, something fixed, or sell the home outright.

  • Adjustable Rates (ARM)
  • Conforming Loans
  • Jumbo & Super Jumbo Loans
  • FHA, VA, & USDA Loans
  • Terms from 5 to 30 Years

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