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.

There have been extended time periods where the adjustable rate mortgage was the best mortgage option. Borrowers had their home mortgage payments reduced year after year. In the long run, mortgage rates are cyclical. When the condition of the world financial markets change, adjustable rate mortgages can skyrocket.

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.

Keeping these various factors in mind, the rate of adjustable mortgage is determined. This pre-determined rate of interest is applicable for the rest of the fiscal year, though it can be revised at any time. Depending on the credit cycle, it is seen that the interest rate for adjustable mortgages diminishes or rises with every passing year.

The problem with the ARM is that the rate and associated payment can increase substantially in any one cycle. For instance, if the rate goes up by just 1% the borrowers actual payment could increase from several hundred dollars to in the thousands.

Any sudden increase in ARM payments will make it more and more difficult for people to keep their property, especially if their income is either constant or going down due to the changes in the economy.

If there are good economic conditions and the credit cycle favors, you may benefit from a reduction in interest rates on your ARM. If you are unsure of how interest rates will behave, the only thing that you can do is opt for a fixed rate of mortgage. On fixed rate mortgages, the rate of interest is fixed at the time of taking the mortgage, and hence, is not dependant on market conditions beyond your control.

About the Author:

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Get all the information and photos:: http://mortgagewide.info/is-an-adjustable-rate-mortgage-arm-right-for-you/