Journeying into the vast world of home ownership often entails a deep understanding of mortgage loans and the various types they come in – one of them being an Adjustable-Rate Mortgage (ARM). Known for its varied mortgage loan interest rates, an ARM might just be the key for prospective homeowners to unlock their dream domicile.
Adjustable-Rate Mortgage: A Brief Overview
To fathom the workings of an Adjustable-Rate Mortgage, one needs to first comprehend what exactly it is. Commonly known as a variable-rate mortgage, an ARM is a type of home loan where the interest rate modifies over the loan’s lifetime. These changes result in varying mortgage loan EMI (Equated Monthly Installment), which can be calculated through a mortgage loan EMI calculator.
The initial interest rates in Adjustable-Rate Mortgage are typically lower than fixed-rate mortgages. This low introductory rate, often termed as the “teaser rate,” lasts for a predetermined period ranging from a month to several years. Post the initial phase, the mortgage loan interest rates may increase or decrease, depending entirely on the current state of the financial market.
Different Varieties of Adjustable-Rate Mortgages
Let us now delve deeper into the different types of Adjustable-Rate Mortgages and see how mortgage loan interest rates fluctuate in each.
1. Hybrid ARMs:
The most common type, hybrid ARMs, couple the features of both fixed-rate and adjustable-rate mortgages. These ARMs have an initial fixed-rate period followed by an adjustable rate for the remainder of the loan. They are usually denoted by two numbers, such as 5/1, where ‘5’ denotes the years with a fixed rate, and ‘1’ signifies the adjustment period.
2. Interest-only ARMs:
This variant allows homeowners to pay only the interest for a specific period, typically 5-10 years. This results in lower initial payments; however, once the interest-only period is over, the payments increase. It annoins to repay both the principal amount of the loan and the interest.
3. Payment-option ARMs:
In this type, the borrower has the option to choose from multiple payment methods each month – a standard principal plus interest payment, an interest-only payment, or a minimum payment that might not cover the month’s interest. This flexibility can be a boon for some but might lead to “negative amortization” if the minimum payments are consistently chosen.
4. Negative Amortization ARMs:
Also known as NegAm loans, in this type, the borrower’s payments are less than the actual interest charged. The difference then gets added to the loan balance, causing the amount owed to increase over time, despite making payments – a state known as negative amortization.
Calculating an ARM using a Mortgage Loan EMI Calculator
A mortgage loan EMI calculator simplifies the process of figuring out the monthly payments for various types of loans, including ARMs. To calculate, users are typically required to input the loan amount, loan tenure, and the interest rate. While it may not include any possible rate adjustments, it provides an approximate figure for the initial payments.
Conclusion
An Adjustable-Rate Mortgage, with its fluctuating mortgage loan interest rates and array of choices, does offer an enticing option for potential homeowners. It might be beneficial for those planning to sell their house before the end of the initial fixed-rate period or those expecting their income to rise in the future. However, the potential increase in payments due to rate modifications can also pose as a potential risk. It is thus crucial for any prospective borrower to judiciously weigh the pros and cons, harness tools such as a mortgage loan EMI calculator for an informed projection, and find the mortgage type that best fits their financial standing.