If you are in the market to buy a home for yourself, you may be thinking how to maximize your buying power. To increase buying power, a would-be homebuyer can either increase their income or down payment, or lower the mortgage interest rate on their loan. Since most people cannot increase their income at will, or come up with a larger down payment, getting a lower mortgage rate is the only option. An adjustable rate mortgage (ARM) offers the opportunity for a would-be homeowner to get a lower interest rate in the early years of the mortgage. The initial rate on ARM loans can be lower than prevailing rates on 30 year fixed rate loans, for a period of 1-10 years, depending on the program chosen. Once the introductory period is completed, the interest rate on the loan will adjust every year – tied to an interest rate index.
However, you should closely examine what your monthly payment will be when the introductory period on the ARM loan is completed. Assuming a 2% increase in interest rates, determine what a potential mortgage payment would be using a mortgage payment calculator (typically found on the Internet). If you cannot afford the monthly payment assuming a 2% increase, you should not consider an ARM loan. Many people in the past have been forced to talk with their lenders about mortgage loan modification with their lenders, as rising payments on ARM loans made their monthly payments unaffordable. If you need assistance weighing the benefits and risks of adjustable rate mortgage loans, consult with a licensed mortgage professional.