Types of Adjustable Rate Mortgages

When people shop for a new home, they will have a number of options with how to finance the home. The most popular types of mortgages available to the general public are fixed mortgages, variable mortgages and adjustable rate mortgages. Over the past few years, the popularity of adjustable rate mortgages has been on the rise. In fact, many speculators say that the cause of the housing market crash is due to the lack of understanding with how adjustable rate mortgages work. An adjustable rate mortgage is a type of home loan that has an interest rate that will change throughout the life of the loan.

There are different types of adjustable rate mortgages that home buyers should be aware of. First off, the traditional adjustable rate mortgage is one of the popular types of mortgages. Traditional adjustable rate mortgages are associated with having a regular changing interest rate. These interest rates typically change every 6 months to 12 months, depending on the mortgage loan. Some traditional adjustable rate mortgages may have an interest rate that changes every 3 years or every 5 years. The interest rates are adjusted according to the interest rates in the markets. If the homeowner is ready for rising interest rates, they are advised to stay away from traditional adjustable rate mortgages.

Another type of adjustable rate mortgage is the hybrid adjustable rate mortgage. The hybrid ARM works slightly different than the traditional adjustable rate mortgage. A hybrid adjustable rate mortgage isn’t as risky as a traditional adjustable rate mortgage because there is a fixed rate period. The hybrid ARM has a fixed rate period and an adjustable rate period. These types of loans will typically have a fixed interest rate for the first 5 years, or 10 years. After the fixed rate period, the mortgage will have an adjustable rate on a yearly basis.

The terms “10/1 or 5/1” are used for certain types of hybrid adjustable rate mortgages. A 10/1 hybrid ARM has a fixed rate on the mortgage for the first 10 years. Each year after the fixed rate will have an adjustable rate. The 5/1 hybrid ARM has a fixed rate period of 5 years, and then an adjustable rate on the mortgage each year after that. Homeowners who choose the hybrid ARM mortgage should plan ahead for the time when the adjustable rate initiates. In other words, if the homeowner is planning on leaving their home in 5 years, they will choose the 5/1 hybrid ARM mortgage because they will be avoiding the adjustable rate on the mortgage.

Another type of adjustable rate mortgage is the payment option. The payment option ARM works slightly different than the traditional or hybrid adjustable rate mortgage. In fact, the payment option ARM works by allowing the homeowner to choose how they want to pay on their mortgage every month. In other words, the homeowner has the ability to pay only the interest one month, while paying on the minimum the next month. The homeowner will have plenty of options on how they would like to make their monthly payments.

Adjustable rate mortgages should not be taking lightly. Conservative homeowners will choose more secure and reliable mortgage payments by choosing a fixed rate mortgage. Only those who are willing to deal with changing interest rates on a mortgage should use adjustable rate mortgages. There are plenty of options with adjustable rate mortgages that should be considered as well. As stated earlier, many speculators have stated that many homeowners didn’t actually know how adjustable rate mortgages actually work, which led to many foreclosures and bankruptcies that contributed to the housing collapse in 2008.