Do Adjustable Rate Mortgages Really Save You Money?

You have to know the facts about Adjustable Rate Mortgages before you sign any loan documents. An Adjustable Rate Mortgage or an ARM as they are called in the mortgage industry, could end up costing you and "arm and a leg" in the end.

An ARM is a great way for new home buyers to get in a home and help them save money up front, but if you don't know the rules you could end up hurt. Here's a few things you should know before you say "yes" to an ARM.

Most ARM's only have great terms for a short period of time and they can change at any give time depending on your loan. ARM's are far more risky than a conventional 15 or 30 year mortgage with a fixed rate. An ARM could end up costing you a lot of money and a lot of heartache in the long run. This is the primary reason why so many people end up making late payments or having their home foreclosed on them.

As a home buyer, you need to understand how an ARM interest rate is put in place. The ARM's rate is based on what the current stock market prices are doing at that time. Your mortgage company then adds on their own fees and the interest rate or points, go up. As the economy fluctuates, so will your mortgage loan.

ARM's generally start off with extremely low rates. The interest rate you start off with is only available for a set period of time, say, three to five years. After that time period, your mortgage will more than likely be a more than it was previously.

No two ARM loans are alike. But all ARM loans are dictated by two numbers. There is a number for the amount of time of the low interest rate will last and there is a number for the amount of fees the lender has added. An example of this is a 5/1 ARM where the low interest rate is locked in for 5 years with the possibility of it being adjusted once a year. Now how much your mortgage goes up is soley based on the stock market.

Adjustable Rate Mortgage's offer some financial boon as well as some financial risk and so borrowers need to know how they can benefit from it without losing their homes. When the loan is done right, the borrower really has nothing to worry about.

A way to protect yourself from being loan rich and house poor is to make sure there is some limits on how much your mortgage and interest rate can go up. You have 2 different cap limits, which will be offered to you as the purchaser of the home mortgage.

1. The first limit is a limit on the interest rate. This makes sure that your loan does not go from being 4.5% to 10% in the space of one year. Limits on the amount a lender can raise your mortgage payment is another type protection.

2. Limits on the amount a lender can raise your mortgage payment is another type protection.

You should make sure there are provisions in your Adjustable Rate Mortgage contract for interest rate and payment caps. If you sign your contract without making sure these two items are in there, you could end up very unhappy with your home and your home buying experience.

The payment and interest rate caps are there to help you and if you don't ask about what your ARM offers, you could wake up to a very rude surprise of owing more money than you can actually pay.