Mortgage Products: The 30 Year ARM

As you begin to traverse the actual home appraisal, the loanamortization, your down payment, and all the dots that must be connected inorder to make the dream a reality, you suddenly realize that you may not beable to afford a payment on the Fixed Rate Mortgage plan. What other options are available? Well, there’s the Adjustable Rate Mortgagethat is a close first cousin to the Fixed Rate mortgage, just a little riskierwhen it comes to establishing the interest rate. What products are available with theAdjustable Rate Mortgage? Whatadvantages does the Adjustable Rate Mortgage option offer, and what are theydrawbacks, if any? This article examinesthe advantages and disadvantages, if any, of the Adjustable Rate Mortgage andthe 30 Year ARM option.

The Adjustable Rate Mortgage, or ARM,is a more affordable option for homeowners who have a fairly tight monthlybudget, and who 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 30 Year ARMis one of the less used ARMoptions, simply because of the length of time before expiration; generally,homeowners will seek to establish a set interest rate before the 30 year termis over.

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 30 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.

The disadvantage 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. 

Another great 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 in your early thirties, your income level isexpected to continually increase over the next 15 years, and your expenses aregoing to drastically decrease, you would probably benefit from the standard 30Year ARM that converts to aFRM. All the other complicated optionsstill simply do not benefit the average homeowner today. Now, if you don’t happen to be average, andyou have a financial advisor that can work with you closely, I’d recommend thatyou consider all those other options, but only with the assistance of a trainedfinancial analyst. After all, your homeis a purchase you definitely do not want put at risk. The 30 Year ARMis a good, solid product that allows the homeowner to build equity, with a lowinterest payment each month, while also providing the lending institution theopportunity to reset an interest rate, if they should begin to rise quickly. This is one of the greatest reasons bankstend to promote the ARMs as much as they do the standard FRMs: they’re fairlysafe, time-tested products.