Adjustable Rate Mortgages

Back in the real estate "boom" days, using an adjustable rate mortgage seemed like a clever idea. Those looking for the lowest interest rates possible and even those who planned on only owning their home until the ARM's readjustment period were all willing and eager to sign on the dotted line.

Fast forward to 2008, when the the foreclosure rate skyrocket to 75 percent and the hot real estate market came to a screeching halt. Part of this catastrophe was fed by the jumps in interest rates during the readjustment periods of adjustable rate mortgages.

The Temptation of Adjustable Rate Mortgages

When consumers first start their mortgage research process, adjustable rate mortgages can be a huge money saver. Financial lenders offer borrowers introductory interest rates that are lower then the national average. The reason is the borrowers, not the bank, are assuming that the interest rates are going to fluctuate and will then either reap the rewards of an interest rate cut or have to come up with the additional resources to pay the increased amount.

ARMs and Sub-Prime Mortgages

While the boom years were occurring new home construction was moving at a quickened pace and lenders were approving large quantities of sub-prime mortgages. Many of the mortgages were of the adjustable rate mortgage variety. The areas ofLas Vegas, West Palm Beach, Miami and Phoenix experienced the largest proportion of both and thus according to the FDIC was the heart of declining home values. According to the FDIC "In 2008,these states held 46 percent of the prime ARMsoutstanding nationwide and 64 percent of foreclosuresstarted within this mortgage category."

That high default rate could be attributed to the change in rates that are naturally part of the adjustable rate mortgage structure. Many of those homeowners experienced their undoing due to spikes in interest rates that they were not financially prepared to take.

The Damage Done

For those home buyers who played a game of chance and hoped that their ARMs would drop, the damage has already been done.

However, the good news is that those who are up-to-date on their adjustable rate mortgages are now benefiting from the lowest historic interest rates in decades and so are those who are refinancing their mortgages.

If you are currently in an ARM, take the opportunity to research fixed mortgage rate opportunities at www.gobankingrates.com

The perfect storm of economic chaos is creating the best buyer's market for home shoppers in ages. People can find exactly what they want at bargain basement prices and mortgage rates at historic lows.

Even lower than the rates for traditional fixed rate mortgages are the introductory rates that come courtesy of adjustable rate mortgages. However, before signing on the dotted line committing to an ARM it is important to understand the full breadth of adjustable rate mortgages and how getting one may be for a lot longer then you initially anticipated.

How Do Adjustable Rate Mortgages Work?

Even if you plan on taking advantage of the low interest rates provided by ARMs until the rate resets, you need to know how the mortgage is actually constructed. ARMs are set up so that a bigger portion of the payments for the first five years of the loan go toward paying off the interest and less goes toward the principal debt. With an ARM you may end up paying five timesmore toward interest than principal during the initial loan period.

After that five year period the ARM rate period expires and the interest rate must be reset. If you are lucky, the interest rates have dropped substantially and you will benefit from being able to take advantage of them. If not, the rates have gone up and you are now in the position to either keep paying off the loan in hopes that you will catch a break during the next reset period or you may choose to refinance with a fixed loan at the higher rate.

How Long Do Adjustable Rate Mortgages Last?

If you choose to to get out of your ARM and into a fixed loan most commonly people choose 30-year fixed rates. When that happens, you are actually extending the life of your mortgage on top of your initial loan, thus you will ow be paying for your home for a total of 35 years. If you decide to refinance your ARM with a similar such loan, the cycle will still be in place and the payment period can extend upwards of 45 years.

The long and short of it, is ARMs are designed to keep feeding this cycle and to make consumers pay more over the long run for the loan. There are some ways to use ARMs to your advantage, but if you plan on staying in your home for the long haul, a traditional 30-year fixed rate mortgage may be best.

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