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Raleigh Real Estate Answers – I am considering purchasing a Raleigh, NC home? Should I consider an Adjustable Rate Mortgage?

Raleigh Real Estate Answers – I am considering purchasing a Raleigh, NC home? Should I consider an Adjustable Rate Mortgage? According to an article in the NY Times last week, more borrowers are opting for adjustable-rate mortgages. One has to ask why? After all, ARM’s were trademark of the subprime mortgage boom that helped to bring about the high rate of mortgage defaults and home foreclosures across the country. Adjustable-Rate Mortgages (ARM’s) are a non-traditional form of loan where the borrower takes on the risk of rising interest rates. Because ARM’s shift the risk of interest rate fluctuations to the borrower, lenders normally charge a lower rate for an ARM than for a fixed-rate loan. ARM’s are popular as they can help borrowers qualify more easily for a home loan or for a more expensive home. ARM products of the past had “gimmicky” extra-low “teaser” rates that adjust every six months or the “pick-a-pay” and “option” features that allow borrowers to pay less than the monthly interest, only to be hit with a huge bill down the road.” The majority of borrowers prefer the security of a fixed rate (provided the rate is not too high). ARM’s have maintained a place in the market despite comparatively low mortgage rates. As interest rates rise, so does ARM popularity. So, how do ARM’s work? A borrower’s interest rate is determined initially by cost of money when the loan is made. Once initial interest rate for loan is set, rate of loan is tied to a widely recognized and published index such as Average One-Year Treasury Constant Maturity Index (TCM), the Cost of Funds Index (COFI) or the LIBOR (London Interbank Offering Rate). Future interest rate adjustments for ARM loans are based on the up and down movements of the index. The larger the loan, the more significant the savings an ARM can bring but again there is the built in potential of a rate increase which can wipe out the initial savings. Thus it is important to know your goal when it comes to home ownership. If you are considering an ARM for your Raleigh Home purchase, be sure to have your lender explain the differences in your specific situation between the ARM and a fixed rate loan.

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