SAN DIEGO, June 21, 2013 /PRNewswire-iReach/ -- An adjustable rate mortgage (ARM) is a type of home loan structure that is popular with many home buyers for a number of reasons. LoanLove.com recently posted a new Adjustable Rate Mortgages 2013 guide that can help home buyers or current home owners to decide if this type of mortgage would be the best option for them in their situation.
LoanLove.com, a new borrowers advice website founded just this April, has a mission to help consumers and borrowers alike in obtaining the latest information on mortgage lending trends, the real-estate market and the U.S. financial landscape for the purpose of helping them obtain a home loan they love. The newly posted guide is just one in a series of articles explaining the pros and cons of different home loan types.
Although there are different types of adjustable rate mortgages available, one of the most popular is the 5/1 ARM. Loan Love explains: "The 5/1 ARM has become increasingly popular in recent years, primarily because of its initial lower monthly payments. In a 5/1 ARM (adjustable rate mortgage), the consumer pays a relatively low interest rate for five years (or 60 months), after which the interest rate will adjust to a higher level and will readjust annually until the loan is paid in full."
There are a number of situations when this type of loan would be beneficial. For example, if the homeowner is expecting their income to increase within the next five years, due to them finishing school or being in line for a promotion or pay increase. This type of loan allows them to start with quite low monthly payments, so if they are quite certain of a pay increase down the line this type of mortgage can allow them to begin their homeownership at an easier level.
Another reason that 5/1 ARMs can be beneficial is when a home owner is not sure how long they want to live in an area. If work could mean they need to move more frequently, the 5/1 ARM can be more affordable than renting because if the homeowner resells and moves before the first adjustment they will only have to pay the initial low payment for the years that they stay in the house.
This type of ARM can also be a great option for those with less than perfect credit scores. As the Loan Love article explains: "In the past, some lenders have been more willing to write a loan with a shorter term to borrowers who have less than ideal credit. If this is you, use the five years to practice good credit habits so you can refinance favorably at the end of the term."
However, there are also some downsides to this type of loan, primarily the fact that it is impossible to predict how interest rates will fluctuate within five years, so the homeowner may be facing a considerably higher payment after the first adjustment. This is why it is advisable for anyone who chooses this type of loan to make sure they keep their credit in good standing; this will enable them to have better refinance options if they do plan to stay in their house but see that they would not be able to afford it after the adjustment.
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