Mortgage Products: The 30 Year ARM. Interesting Points to Bear in Mind

Posted on August 8, 2009
Filed Under Mortgage | Leave a Comment

As you begin to traverse the actual home appraisal, the loan amortization, your down payment, and all the dots that must be connected in order to make the dream a reality, you unexpectedly realize that you may not be able to afford a payment on the Fixed Rate Mortgage plan. What other options are obtainable? Well, there’s the Adjustable Rate Mortgage that is a close first cousin to the Fixed Rate mortgage, just a little riskier when it comes to establishing the interest rate. What products are obtainable with the Adjustable Rate Mortgage? What benefits does the Adjustable Rate Mortgage option offer, and what are they drawbacks, if any? This article examines the pros and cons, if any, of the Adjustable Rate Mortgage and the 30 Year ARM option.

The Adjustable Rate Mortgage, or ARM, is a more affordable option for homeowners who have a fairly tight monthly funds, and who have a need for larger home, lower payment. The typical ARM customer wishes to build equity in their home; though they need the lowest monthly payment possible, for a certain number of years. The homeowner this program most benefits is the individual who expects profits increases to occur within a few short years, but in addition has an expanding family with a need for space. The 30 Year ARM is one of the less used ARM options, simply because of the length of time before expiration; generally, homeowners will seek to establish a set interest rate before the 30 year term is over.

An ARM works in this way: when you set up your mortgage on an ARM, the interest rate you have will only be set for the extremely short period of time, normally only 6,9, or 12 months. At the end of that period, the interest rate will be re-evaluated, and if the rates have increased based on the prime, your interest rate will also increase; once again, for a small, set period of time. The advantage derived from this category of loan, during today’s economy, is that the interest rates are at an all time low. That equates to big savings for current home buyers, and homeowners who refinance.

The 30 Year ARM allows the mortgage loan to function as an adjustable rate mortgage for 15 years, automatically converting to a fixed rate loan after that 15 year period has expired, for another 5, 7, or 10 years.

The disadvantage to this kind of loan occurs when interest rates begin to climb. As the rate rises for the lending institution, it also rises for you, the homeowner. The home mortgage product market can be incredibly puzzling, and quite frustrating if you don’t take the time to completely do research and know your mortgage options.

One more great advantage to the ARM, when interest rates are low, is that it allows you to build equity faster than with a standard fixed rate mortgage. But if interest rates begin to rise, quickly, your opportunity for building equity quickly, is greatly diminished, because more of the payment is directed to the interest on the loan. If you fall into the category of the typical homeowner, ARMs aren’t as attractive as the fixed rate mortgage; but let’s face it the typical homeowner category seems to be shrinking.

All in all, if you are buying a home in your early thirties, your income level is expected to continually increase over the next 15 years, and your expenses are going to drastically decrease, you would in all probability benefit from the standard 30 Year ARM that converts to a FRM. All the other complicated options still plainly do not benefit the average homeowner today. Now, if you don’t happen to be regular, and you have a financial advisor that can work with you closely, I’d recommend that you consider all those other options, but only with the assistance of a trained financial analyst. In any case, your home is a purchase you definitely do not want put at risk. The 30 Year ARM is a good, solid product that allows the homeowner to build equity, with a low interest payment each month, while also providing the lending institution the opportunity to reset an interest rate, if they should begin to rise quickly. This is one of the greatest reasons banks tend to promote the ARMs as much as they do the standard FRMs: they’re fairly safe, time-tested products.

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