Using an Adjustable Rate Mortgage to your Advantage

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Using an Adjustable Rate Mortgage to your Advantage

In recent years, sub prime mortgages Arizona have earned a bad reputation. However, they can be a good option for borrowers to save on interest and insurance costs.
A subprime mortgage is a loan given to a borrower who is considered to be a higher risk due to a poor credit score. Typically a subprime borrower has a credit score of less than 640, but this does vary. Since the lender is assuming a higher risk, the interest rate is also generally higher. Critics of subprime lending argue that it charges unfair interest rates and further burdens individuals with low incomes and high amounts of debt. However, for many individuals, sub prime mortgages Arizona are the only way they can qualify for a home loan.
The most common type of a sub prime mortgage is an adjustable rate mortgage or ARM. An ARM starts off at a low interest rate, usually lower than the prime rate around 2-3 percent. After a period of time from 1 to 5 years, the rate then adjusts to a much higher rate anywhere from 5 to 10 percent, depending on market conditions. This will cause your payment to go up rapidly. ARMs got a bad reputation during the housing crisis of the mid 2000s and were accused of being a way for banks to loan money to and take advantage of subprime borrowers. Many people lost their home due to the inability to make the new, higher payments after the rate adjusted.
Adjustable rate mortgages have been attacked by both talk news show hosts and some financial advisors who claim this type of loan is single handedly responsible for the foreclosure crisis and subsequent economic recession. This however, is too simplistic of a picture and throws the baby out with the bathwater, so to speak. While there are risks to sub prime mortgages Arizona, there are also benefits to ARMs that can be taken advantage of by both sub prime and high credit borrowers.
Benefits of an Adjustable Rate Mortgage
For many people, a traditional mortgage actually costs them money and simply does not make sense. Most people do not live in a home for 30 years, in fact the average time frame is 8 to 10 years. Even if they stay for longer, most people end up refinancing their mortgage at least once and some people refinance every 2 to 3 years. This ends up costing a significant amount in interest because in traditional home loans, you pay the majority of you interest during the first half of the loan term. Also, traditional 30 year loans charge a higher interest rate as a type of insurance for the lender. The lender assumes you will take 30 years to pay off the debt. 30 years is a long time and there is a chance that something could happen that would cause you to default. The lender charges you a higher interest rate to earn more money to keep as a type of insurance against default. The terms on an adjustable rate are only about 1 to 5 years so they can offer a lower interest rate since the term is shorter and less risky for the lender. An adjustable rate mortgage has a much lower interest rate than a traditional mortgage which can save you thousands of dollars over the loan term.
Although the rate of ARMs does adjust with time, you can always refinance to either a lower fixed rate mortgage or even another adjustable rate mortgage. Taking advantage of the lower interest rates of an ARM could save you thousands on mortgage interest, giving you more money to pay off the balance of your loan. As a result, you can pay off your home sooner and pay significantly less interest.
The most important piece of advice regarding ARMs, is to never overextend yourself. Many people bought homes that were otherwise out of their budget by taking advantage of the low interest payments offered by an ARM. Once the rate reset, they were unable to afford the home and could not refinance to a fixed rate mortgage because the home was out of their budget. Make sure that you budget for payments with an increased interest rate and buy a home that you can actually afford.
                               
Talk to a mortgage broker to determine if an adjustable rate mortgage makes sense for you.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Tel:  (623) 582-4444 | Fax: (888) 279-6917

www.level4funding.com
NMLS 1057378 | AZMB 0923961 | MLO 1057378
23335 N 18th Drive Suite 120
Phoenix AZ 85027

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