Mortgage Products: The 15 Year ARM

As you begin totraverse 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 suddenly realize that you may not be able to afford a payment on the FixedRate Mortgage plan. What other optionsare available? Well, there's theAdjustable Rate Mortgage that is a close first cousin to the Fixed Ratemortgage, just a little riskier. Whatproducts are available with the Adjustable Rate Mortgage? What advantages does the Adjustable RateMortgage option offer, and what are they drawbacks, if any? This article examines the advantages anddisadvantages, if any, of the Adjustable Rate Mortgage and the 15 Year ARM option.

The AdjustableRate Mortgage, or ARM, is a moreaffordable option for homeowners who have a fairly tight monthly budget, andwho have a need for bigger house, lower payment. The typical ARMcustomer wishes to build equity in their home; however they need the lowestmonthly payment possible, for a certain number of years. The homeowner this program most benefits isthe individual who expects income increases to occur within a few short years,but also has an expanding family with a need for space. The 15 Year ARMis one of the more used ARMoptions, simply because of the attractive monthly payment, and the length oftime the homeowner has to build more equity in an affordable payment.

An ARM works in this way: when you set up yourmortgage on an ARM, the interestrate you have will only be set for a very short period of time, normally only6,9, or 12 months. At the end of thatperiod, the interest rate will be re-evaluated, and if the rates have increasedbased on the prime, your interest rate will also increase; once again, for ashort, set period of time. The benefitderived from this type of loan, during today's economy, is that the interestrates are at an all time low. Thatequates to big savings for current home buyers, and homeowners who refinance.

The 15 YearARM allows the mortgage loan tooperate as an adjustable rate mortgage for 15 years, automatically convertingto a fixed rate loan after that 15 year period has expired, for another 5, 7,or 10 years.

Thedisadvantage to this type of loan occurs when interest rates begin torise. As the rate rises for the lendinginstitution, it also rises for you, the homeowner. The home mortgage product market can be veryconfusing, and quite frustrating if you don't take the time to fully researchand understand your mortgage options. 

Anothergreat benefit to the ARM, wheninterest rates are low, is that it allows you to build equity faster than witha standard fixed rate mortgage. But ifinterest rates begin to rise, quickly, your opportunity for building equityquickly, is greatly diminished, because more of the payment is directed to theinterest on the loan. If you fall intothe category of the typical homeowner, ARMs aren't as attractive as the fixedrate mortgage; but let's face it the typical homeowner category seems to beshrinking.

All in all,if you are buying a home, and your income level is expected to increase overthe next 10 years, or your expenses are going to drastically decrease, youwould probably benefit from the standard 15 Year ARMthat converts to a FRM. All the othercomplicated options still simply do not benefit the average homeownertoday. Now, if you don't happen to beaverage, and you have a financial advisor that can work with you closely, I'drecommend that you consider all those other options, but only with theassistance of a trained financial analyst. After all, your home is a purchase you definitely do not want put atrisk. The 15 Year ARM is a good, solid product that allows thehomeowner to build equity, with a low interest payment each month, while alsoproviding the lending institution the opportunity to reset an interest rate, ifthey should begin to rise quickly. Thisis one of the greatest reasons banks tend to promote the ARMs as much as theydo the standard FRMs: they're fairly safe, time-tested products.