Rethinking ARMs (Adjustable Rate Mortgages)

Rethinking ARMs (Adjustable Rate Mortgages)

Common indexes used for Adjustable Rate Mortgages (ARMs) over an 11-year period (1996-2006). Shown: 1-year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). To determine the interest rate on an ARM, lenders add a few percentage points to the index rate, called the margin. (Photo credit: Wikipedia)

Rethinking ARMs (Adjustable Rate Mortgages)

I have always been of the opinion that if you don’t know what an ARM is you have no business messing with it.  I am mellowing a little bit on this point, so here goes:

Some ARM Features:

  • An ARM is a mortgage that starts out at a certain low rate and, at a fixed point in the future switches to a new rate.
  • Typical time frames are 3, 5 or 7 years in the future.
  • The new rate is typically determined by a specific index such as the rate on treasury bonds.
  • The new rate is usually capped at a high of 2% more.
  • ARMs can get you into a home right away that you can’t otherwise afford
  • Good candidates for ARMs include younger families who will need bigger places in the near future or professionals who  get transferred frequently.

Wishful Thinking can Afflict us all

Wishful thinking about a home’s future appreciation is not a good reason to get an ARM.

Why am I mellowing on ARMs? Why am I rethinking arms (adjustable rate mortgages) ?

ARMs are going at record lows.  According to a 7 year ARM can now be had for 3.5%.  A 5 year ARM will be 3.2%.  The difference between a fixed rate and adjustable mortgage has widened to 1.3 percentage points from a normal of .44%.  There is some risk still associated with ARMs but the immediate advantages can be compelling if your personal situation otherwise warrants it.

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After practicing law for 37 years Edward F. St. Onge, Sr. now devotes all his time to helping consumers achieve a high credit score with amazing speed. Learn the counter-intuitive secrets to credit scoring through his down to earth instructions backed by extensive knowledge of the laws and trends. All of the latest tricks and techniques that they don't want you to know now at your disposal. At last a level playing field for the consumer!

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