Mortgage Products: The 20 Year ARM

As you begin to traverse theactual home appraisal, the loan amortization, your down payment, and all thedots that must be connected in order to make the dream a reality, you suddenlyrealize that you may not be able to afford a payment on the Fixed Rate Mortgageplan. What other options areavailable? Well, there’s the AdjustableRate Mortgage that is a close first cousin to the Fixed Rate mortgage, just alittle riskier. What products areavailable with the Adjustable Rate Mortgage? What advantages does the Adjustable Rate Mortgage option offer, and whatare they drawbacks, if any? This articleexamines the advantages and disadvantages, if any, of the Adjustable RateMortgage and the 20 Year ARMoption.

TheAdjustable 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 20 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.

AnARM works in this way: when youset up your mortgage on an ARM,the interest rate you have will only be set for a very short period of time,normally only 6,9, or 12 months. At theend of that period, the interest rate will be re-evaluated, and if the rateshave increased based on the prime, your interest rate will also increase; onceagain, for a short, set period of time. The benefit derived from this type of loan, during today’s economy, isthat the interest rates are at an all time low. That equates to big savings for current home buyers, and homeowners whorefinance.

The20 Year ARM allows the mortgageloan to operate as an adjustable rate mortgage for 20 years, automaticallyconverting to a fixed rate loan after that 20 year period has expired, foranother 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.

Allin all, if you are buying a home, and your income level is expected to increaseover the next 10 to 15 years, or your expenses are going to drasticallydecrease, you would probably benefit from the standard 20 Year ARM that converts to a FRM. All the other complicated options stillsimply 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 20Year ARMis a good, solid product that allows the homeowner to build equity, with a low interestpayment each month, while also providing the lending institution theopportunity to reset an interest rate, if they should begin to risequickly. This is one of the greatestreasons banks tend to promote the ARMs as much as they do the standard FRMs:they’re fairly safe, time-tested products.