An adjustable rate mortgage is another option for borrowers to get a house. It is a great alternative for people who are looking to buy a house with only small payments for the first few years of the loan. However, while all these things may sound quite irresistible, the ARM still has its pros and cons.
Unlike most mortgages, ARMs have options that borrowers can choose each month. The borrowers can choose from the following type of payments:
The minimum required a monthly fee for this options is quite attractive to most homebuyers because of its small home loan monthly payments. It's so small that it doesn't even take care of the mortgage's interest rates. By choosing to pay the minimum, borrowers place themselves in a position called negative amortization. It means that the borrowers owe more on the real estate property at the end of each month than what they did at the start of their home loan. While choosing to pay the minimum payment is not entirely advisable, it is popular in areas where houses are expensive.
However, these small payments don’t last forever. As soon as the loan has reached its fifth year, or once the outstanding home loan balance has reached 110% of the initial mortgage amount, most option ARMs are then recalculated to determine the fully amortized monthly payment. Borrowers would then have to make new payments to pay off the property completely over the remaining years of the loan's term.
Choosing to move up the scale a notch means that payments will be a little higher than the minimum payment and covers the interest. However, it doesn't reduce the principal amount. So the borrower doesn't make any headway when it comes to owning the house.
It is probably the most common type of mortgage plan which most borrowers are familiar with. Choosing this home loan makes the borrower's monthly payment cover the interest and also reduces the principal balance.
15- Year Mortgage
It enables the borrowers to finish their loans quicker than the traditional loan. Choosing this type of ARM would cover the interest and also reduces the home loan's principal balance.
The interest rate on most of the ARMs varies every month. Also, most of this type of home loans have a cap on the amount that the rate can increase every year. So even if the actual required monthly payment changes once every year, the difference between the sum of the yearly adjustment and the first month's interest rate can go over for as much as 7 percent. So if the outstanding balance goes as high as 110 percent of the original balance, then there's no cap on the possible amount of the interest rate increase.<< Back to the list.
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