Mortgage leads loans Rates

As you begin to traverse the actual home appraisal, the loan amortization, your down payment, and all the dots that must be connected in order to make the dream a reality, you suddenly realize that you may not be able to afford a payment on the Fixed Rate Mortgage plan. What other options are available? Well, there’s the Adjustable Rate Mortgage that is a close first cousin to the Fixed Rate mortgage, just a little riskier when it comes to establishing the interest rate. What products are available with the Adjustable Rate Mortgage? What advantages does the Adjustable Rate Mortgage option offer, and what are they drawbacks, if any? This article examines the advantages and disadvantages, if any, of the Adjustable Rate Mortgage and the 30 Year ARM option.

The Adjustable Rate Mortgage, or ARM, is a more affordable option for homeowners who have a fairly tight monthly budget, and who have a need for bigger house, lower payment. The typical ARM customer wishes to build equity in their home; however they need the lowest monthly payment possible, for a certain number of years. The homeowner this program most benefits is the individual who expects income increases to occur within a few short years, but also has an expanding family with a need for space. The 30 Year ARM is one of the less used ARM options, simply because of the length of time before expiration; generally, homeowners will seek to establish a set interest rate before the 30 year term is over.

An ARM works in this way: when you set up your mortgage on an ARM, the interest rate you have will only be set for a very short period of time, normally only 6,9, or 12 months. At the end of that period, the interest rate will be re-evaluated, and if the rates have increased based on the prime, your interest rate will also increase; once again, for a short, set period of time. The benefit derived from this type of loan, during today’s economy, is that the interest rates are at an all time low. That equates to big savings for current home buyers, and homeowners who refinance.

The 30 Year ARM allows the mortgage loan to operate as an adjustable rate mortgage for 15 years, automatically converting to a fixed rate loan after that 15 year period has expired, for another 5, 7, or 10 years.

The disadvantage to this type of loan occurs when interest rates begin to rise. As the rate rises for the lending institution, it also rises for you, the homeowner. The home mortgage product market can be very confusing, and quite frustrating if you don’t take the time to fully research and understand your mortgage options.

Another great benefit to the ARM, when interest rates are low, is that it allows you to build equity faster than with a standard fixed rate mortgage. But if interest rates begin to rise, quickly, your opportunity for building equity quickly, is greatly diminished, because more of the payment is directed to the interest on the loan. If you fall into the category of the typical homeowner, ARMs aren’t as attractive as the fixed rate mortgage; but let’s face it the typical homeowner category seems to be shrinking.

All in all, if you are buying a home in your early thirties, your income level is expected to continually increase over the next 15 years, and your expenses are going to drastically decrease, you would probably benefit from the standard 30 Year ARM that converts to a FRM. All the other complicated options still simply o not benefit the average homeowner today.

Now, if you don’t happen to be average, and you have a financial advisor that can work with you closely, I’d recommend that you consider all those other options, but only with the assistance of a trained financial analyst. After all, your home is a purchase you definitely do not want put at risk. The 30 Year ARM is a good, solid product that allows the homeowner to build equity, with a low interest payment each month, while also providing the lending institution the opportunity to reset an interest rate, if they should begin to rise quickly. This is one of the greatest reasons banks tend to promote the ARMs as much as they do the standard FRMs: they’re fairly safe, time-tested products.

I have observed many changes in my life over the course of living it, and I can tell you that as you grow older, Caution will become your friend; when you’re young, you simply throw him to the wind. As you get older, you wait for him to blow by, and then you reel him back in, why? Caution has only a few friends, but several adversaries: Haste and Waste; after several trips around the block with these two, Caution begins to look like a much better friend.

Part of the requirement for being a friend to Cautious, is that you take the time to examine all your options, and make a good sound decision. This is when I was introduced to Financial Planning, 401(k) s, Retirement Funds, etc.

I’ve told this from a story standpoint, but it is in all honesty, the truth. As you get older you do become more cautious in your investments, with your time and your money. Interest only mortgages are one of those options, that if you’re investing in real estate for the short term, and you’ve consulted with a reputable financial advisor, you might want to consider. Investment portfolios do not generally include real estate, so more than likely this is a business venture or an investment business. In either situation, financial planning is a must. This is one of those options, that should however, be considered only after careful planning and thought. The trade off, may be or may not be to your benefit.

Long-term investments, those with capital gains, and purposes other than a quick profit, I don’t’ believe are candidates for the interest only mortgage. The interest only mortgage doesn’t offer much in the way of building and growing investment value, because you simply never increase the value of the asset to you. You increase the value of the loan for the lending institution, because you are continually providing a profitable situation for the lender. Your principal investment responsibility never decreases.

What about the short-term implications and your financial planning? Well, this leaves many doors unopened and many avenues unexplored. However, given the fact that you’re considering the impact of the interest only mortgage product on your financial planning expectations, there aren’t very many “short-term” considerations open for discussion. The only short-term advantage to interest only is that your monthly payment is often very low during the term of the interest only payment.

When you consider the impact your 401(k), an MSA, an IRA, or any other tax deferred savings or retirement program can have on your bottom line, the interest only mortgage doesn’t really have that much to offer in the realm of tax savings, or tax deferment; yes, it’s true that your mortgage interest is tax deductible, but not on a one-to-one ratio. Tax deferred retirement accounts, even SEPs, for the self-employed individual have a one-to-one ratio of tax savings.

Another long-term financial planning consideration: when you would normally have paid out a regularly amortized loan, you will still be paying on the interest only mortgage. What could the potential savings be, for you, if you weren’t still paying on a mortgage? The time value of money is a concept that few consumers ever learn to appreciate. It means the dollar you have today, will be worth less tomorrow than it is today, therefore saving today yields a much better benefit than waiting until you’re 35 or 40 to begin saving and planning for retirement.

Quite often, your home is your greatest asset, and is the only savings that many consumers have managed to accumulate. If the only payments you have made were for the interest due on the principal, you effectively have no accumulated savings. Now, that might not be an issue for someone in their 20s or early 30s; however, by the time you reach your 40s, you have begun to contemplate retirement, and ways to save for that phase of your life.

As I stated earlier, caution and good sound financial planning may determine that an interest only mortgage will benefit you greatly. But, I would only consider this option only after I had taken time for careful consideration and good financial planning.