Option ARM loans are much more complicated than fixed-rate
mortgages. Because they are adjustable-rate mortgages, this means
that the interest rate will fluctuate and there are a variety of
payment options.
On the plus side, an adjustable rate mortgage can allow you
to afford a larger mortgage and are beneficial to those of you who
plan to stay in the home less than five years.
With an ARM, when interest rates go
down, your loan will automatically be recalculated at the new, lower
rate.
However, you need to consider that
with an ARM your payment and interest rates have the possibility of
being raised significantly within the life of the loan. ARMS
generally include caps, but initial rates are generally lower than
market rates so your initial rate adjustment can be a big change.
Knowing that your payments can go up,
should you consider an ARM? Remember, the initial interest rate on
an ARM is generally lower than that of a fixed-rate mortgage, which
may help your chances of qualifying for a loan.
Sometimes ARMS can be converted to a
fixed-rate mortgage. However. you will want to inquire as to the
conversion fees before making a final decision. (Remember to check
with your current lender to see if there are any fees to be waived.)
If you expect your income to rise
annually, the extra income will help you make the higher payments
when rate increases do occur.
Always work with a reputable lender to
compare rates and request a Good Faith Estimate, and don't be afraid
to shop around.
And last, but not least, don't
hesitate to ask questions. You need to have a clear understanding of
the lending package you are considering, whether it be an ARM or a
fixed rate mortgage. Lenders are required to give you written
information to assist in comparing and selecting a mortgage.
