The Adjustable Rate Mortgage (ARM) can be a valuable tool when buying a home. It can also become your worst nightmare.
Benefits of an ARM include:
- Ability to qualify for more house since the qualification is based upon the first payment level.
- Gradual increase in payments if the ARM is correctly selected. This increase will hopefully be made up by an increase in your earnings.
Pitfalls of the ARM:
- Teaser, or introductory rates. This is why so many people are in trouble today. These rates mean your payments will be abnormally low at the beginning. The loss to the lender is made up by resetting after the introductory period to a level greater than the market rate. The change in monthly payment isn't gradual, it happens at once, causing monthly payments to be more than many can pay. Foreclosure is the result.
- High prepayment penalties and excessively long prepayment periods. These lock the borrower into the loan, as it is not possible to borrow enough to pay these. Recently I have seen prepayment penalties of 7% and prepayment periods of up to 9 years.
- Income fails to rise as expected, Even if your income doesn't increase, your payments may. You are obligated to make payments based upon your index, not your income.
I hope this series helps to explain the Adjustable Rate Mortgage. If you have any questions, drop me a line.
Jim Little, Your Sun City Realtor
http://jclittle.com/
Ken Meade Realty
17001 N Del Webb Blvd
Sun City AZ 85373
800-877-1776
623-977-1776
By the way...if you know someone who is interested in buying or selling real estate in the Sun City Neighborhood, Peoria, Glendale or Surprise, please call me with their name and phone number. Thank you!
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