mortagesandforeclosures

by Kevin Pierce

As of a few years ago, the ARM was the best way to buy a home. If you do not have the money to buy your dream home, then you can choose a mortgage with an adjustable rate over a fixed one. In an adjustable rate mortgage, the rate of interest changes every year depending on the market condition. As for a fixed rate of mortgage, the rate of interest is not dependant on the market scenario and remains the same over the term of the loan.

Until a few years ago, an adjustable rate mortgage was a wiser option among both. It was seen, that each year the rate of interest in case of adjustable mortgage was diminishing and hence people had to pay a lesser amount towards their mortgage payment. However, these things are cyclical. Thanks to the onset of rising interest rates in the world market cycle, people are seen to be losing out under an adjustable rate mortgage scheme, as it is dependent on current market scenarios.

The rate in the case of an adjustable mortgage is determined at the beginning of each fiscal year. A fiscal year, for 1 year ARMs starts 1st January and ends on 31st December of the same year. Right at the beginning of the fiscal year, your lender will calculate a rate of lending depending on the index that your mortgage rate is attached to. This rate is calculated based on the index which is influenced by a number of factors like the rate of inflation, rate of lending, credit worthiness, and so on.

The index that affects your Adjustable Rate Mortgage goes up and down with the market. Per the terms of your specific mortgage note, most rates adjust every 1 month, 3 months, 6 months or yearly.

The downside the the ARM is that this rate can increase substantially, and borrowers may find it more and more difficult to make their payments and retain their property. For example, if the interest rate goes up by 1%, borrowers, who earlier had to pay about $600 towards an adjustable rate mortgage payment, may have to pay out as much as $ 670-700 for the same home (depending on the mortgage contract or Note).

A suprise increase in ARM payments will make it harder for the borrowers to make there payment. Especially with the recent liberal underwriting practices before the mortgage crash. Borrowers have seen the employment market get tighter and in many cases seen their income reduced.

If there are good economic conditions and the credit cycle favors, you may benefit from the fall in interest rates of your adjustable rate mortgage. If you are unsure of how interest rates will behave, the only thing that one can do is switch to a fixed rate of mortgage. In case of a fixed rate mortgage, the rate of interest is pre-fixed at the time of taking the mortgage, and hence, is not dependant on any external market conditions.

About the Author:

When shopping for the best rate and terms for your mortgage refinance or purchase, make sure you check PreApproval.com. There is no obligation to apply and it always helps to shop for the best Adjustable Rate Mortgage, and Fixed Rate Mortgage

Get all the information and photos:: http://mortgagewide.info/an-adjustable-rate-mortgagearm-should-you-opt-for-one/