Adjustable Rate Mortgages

There are many forms of loans available in the marketplace today, including mortgages and
other real estate secured loans. Of the mortgages that are available to consumers, the adjustable rate
mortgage, also known as an “ARM,” and may also be referred to as “sub-prime,” is one of the choices
homeowners may have when purchasing or refinancing a loan on real property if the loan's
specifications meet the need of the borrower. The ARM is not limited to owner occupied properties,
but is also available to landlords who rent their properties to tenants. Adjustable rate mortgages can be
a major benefit to a borrower, or if mishandled or misunderstood, can end up being a huge financial
burden to the borrower.

The adjustable rate mortgage was designed for the short term borrower, who requires a below
market interest rate which fluctuates according to the terms of the loan, for a specified period of time.
This below market interest rate results in an initial lower monthly payment on the loan for the first few
years of the loan. Typically the loan is amortized for 15 or 30 years, with the first few years requiring a
lower payment, and when those few years have passed, the interest rate then adjusts closer to what the
current market rate is at that time, while possibly even growing the loan rate higher than the market rate.

The benefits of an adjustable rate mortgage can vary between borrowers. For example, a person
that wants to purchase a home and currently does not earn enough income to qualify to make the
payments on a fixed rate mortgage, may qualify for the payment on an adjustable rate mortgage for the
same loan amount, based on what the payments will be for the first few years. Another example is a
person who knows for sure that they will be selling a piece of property or knows they will be
refinancing the adjustable rate mortgage before the initial low payment period expires. This process
prevents them from having to pay higher payments. Each of these examples may even have an option
of “interest only” during the initial period, in which the required monthly payment for the first few
years may only include the interest, and not any principle to help pay down the mortgage balance.

It is possible that the benefits of an adjustable rate mortgage can be reversed and end up being a
financial nightmare, if the borrower does not know exactly what the loan terms contain or even what
they mean. The examples above appear to be good for the buyers, but if they fail to make a higher
income, or sell or refinance the property, then the borrowers might end up having to pay a mortgage
payment that they will be unable to afford. After the lower payment period has expired, the monthly
payments can immediately (depending on the loan terms) increase to reflect the new interest rate that
the loan defaults to. And, it could be worse if the borrower was paying interest only; not only will the
new payment include the new interest rate, but will also include principle and interest, which could be
too much for some people to handle. It's quite possible for the loan to eventually go into foreclosure if
the payments aren't made, the loan refinanced, or the property sold.

If the borrower is responsible and educated when taking out an adjustable rate mortgage, this
type of mortgage can be very beneficial. Unfortunately, there are many people who have
fallen “victim” to the ARM, and have been unable to recover. When signing mortgage papers, those
few initial years with low payments can seem a long way ahead, when in reality it arrives very fast.
This type of mortgage must be monitored so as to prepare financially for the near future, unlike
traditional fixed rate mortgages, which have the same payment for the life of the loan.