Monday, May 19, 2008

Good ARMs, Bad ARMs

An Adjustable rate mortgage can be a great loan in the right circumstances. A 7/1 ARM or 5/1 ARM offer a fixed rate for 7 or 5 years at a rate up to 3/4 of a point lower than a 30 year fixed rate mortgage. The average consumer keeps a mortgage less than 7 years. On a $175,000 mortgage you could save nearly $7000 in interest over 7 years.

Some ARM loans have received bad press. These ARM loans generally were what was known as a pay option ARM. It was designed to increase a homeowners cash flow to use the savings to grow other investments. Borrowers had the option of making a 30 year payment, 15 year payment, interest only payment or a negative amortization payment where the mortgage balance actually increased if that was the option you selected. The loan was suitable for mature investors, unsuitable for others. They also carried large pre-payment penalties if they were refinanced before a certain date. Personally I never originated a Pay Option ARM with what the news media called "a teaser rate."

ARMs that have fixed rates for 3,5 or 7 years are very common and can save you substantial interest costs over the term. Ask about an ARM today.

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