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3 ARM Loan Benefits


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TERMINOLOGY

Using an ARM loan to finance the purchase of your primary dwelling has become a popular move in recent years. In the past, 30-year fixed mortgages were about the only option you had. While it's nice to have a fixed rate, there are sometimes better alternatives depending on your situation. ARM loans offer several benefits over other forms of mortgages. Here are a few benefits to consider in the area of adjustable rate mortgages.

1. Lower Payment
The most obvious benefit of an adjustable rate mortgage is the lower payment that it offers you right off the bat. You will almost always be able to get a lower monthly payment with ARM as compared to a 30-year fixed mortgage. If you are on a tight budget now but you expect your income to rise in the future, this can be a great way to go.

2. Initial Fixed Rate
Most adjustable rate mortgages have a fixed rate for a certain period of time. A common term for adjustable rate mortgages is the 5/1 ARM. This means that the initial low fixed rate is good for five years and then becomes adjustable. Therefore, for five years, you are enjoying a lower rate than you could get through the use of a 30-year fixed mortgage.

Studies have shown that many people do not live in their house for more than five years. If you plan on being in your house around five years or less, this is the way to go. You can get a lower rate on your mortgage for those five years and then sell the house. If you don't sell the house in five years, you can always refinance the loan into another type of loan that is more favorable. If you plan on being in your house for a short time, there is no reason to go after a long term loan like a 30 or 40-year fixed rate. Getting a loan for that long is overkill in your situation and you might as well take advantage of cheaper interest rates.

3. Lower Adjustable Rates
Once you enter the adjustable portion of your mortgage, the interest rate will be tied to an index that moves up and down. It will more than likely give you the going rate for interest in the marketplace for that time. If the interest rates go down, you can actually get a lower payment than you had in the fixed rate period. Interest rates fluctuate all the time. You have no idea what interest will be five years from now. If you get a 30-year fixed mortgage and interest goes down two or three percent in five years, you are stuck. You might have locked yourself in for seven or eight percent. With an adjustable rate mortgage, you get whatever interest rate is available out there in the market. Many times, this can save you money in the long run. If interest rates increase, you can look at refinancing the mortgage.