Buying a house is indeed a big deal for most of us. It gives us a sense of achievement and perhaps a sense of belonging as we are finally settling down to a place we could call home. There are only a few fortunate individuals in the world that can afford to buy their homes in cash. For the rest of us, mortgage loans are often the best choice to help finance our property purchasing. Now if only shopping for a mortgage loan is even half the fun of shopping for a new house.

As you probably already know there are basically two types of mortgage loans; fixed-rate mortgages and adjustable rate mortgages (ARM). The type of mortgage loans that appeal most to the public is the fixed-rate mortgages. Fixed-rate mortgages offer a better sense of security due to the stagnancy of the interest rate. The interest rate remains the same throughout the entire pay back period. It is different with adjustable rate mortgages (ARM). Although an ARM offers lower initial interest rate compared to fixed-rate mortgages, there is no guarantee that this low interest rate will stay around that figure for the rest of your pay back period.

So if you are looking for cheap mortgage home loans, do not be fooled by the low initial interest rate because this rate will rise or fall in relation to an index such as the Constant-Maturity Treasury (CMT) and the Cost of Funds Index (COFI), plus a margin set up by the lenders themselves. Different loan providers use different margins but margins usually stay constant throughout the life of your loan. You can’t always predict whether the interest rate will go up or down. So you need to be sure of several things before you decide to go for the adjustable-rate mortgage such as:

– If you are buying the house as an investment and you intend to sell it after a short period of time instead of living in it until the loan is paid off

– If you are financially capable of making payments even if the interest rate goes up to the maximum

– If you are expecting for a rise in your personal income to accommodate you paying for your loan

If you do not like surprises, the ARM is definitely not for you. Fluctuating interest rates might give you bits of pleasant surprises when the rates are low but once the rate goes up sky high that is when you are in for a nasty surprise. That is why you need to be financially secure to be able to handle payments even when the interest rate is at its highest. At the same time, you also have to fully understand the gradual changes in your monthly payment program because there is simply no way for you to expect how much you are to pay for the coming months or years. You cannot estimate the amount based on the amount you have paid in previous months or years either.

As mentioned before, the initial interest rate offered might be lower than that of fixed rate. Some professionals call it a teaser-rate where the low numbers are used as marketing tools to entice consumers into applying for the ARM. The biggest mistake you could make is to assume that you won’t be paying a larger sum later on in your loan life. The initial interest rate is low because it is discounted by the loan provider. So you can be sure that in the future, you may have to pay more than you probably expect.

So before you sign up for adjustable rate mortgage loan deals, you need to make sure that you know what you are getting yourself into. You need to be able to see far enough in the future to know that you will be able to adjust your monthly budget to suit the rise and fall of the interest rate of your mortgage. Get your lender to give full disclosure on all the terms and conditions so you will not be unpleasantly surprised later on. If you are confused or do not understand anything, be sure to get your lender to explain everything to you until you completely understand. If need be, get an attorney to read through the agreement document before you sign it because you definitely do not want your lenders to overcharge you without you even knowing about it.

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Category: Finances
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