Home buyers will discover it easier to qualify for an adjustable rate mortgage (ARM) over a fixed rate mortgage. ARMs, also known as variable rate mortgages or floating rate mortgages, are appealing to many home buyers because of their low introductory interest rates. But know that these interest rates are fixed to a fund index, which means your monthly payments will certainly increase at some point. It is imperative to know which specific index a loan is tied to as you do your research. Home buyers need to calculate forthcoming higher payments after the initial term when deciding the price range they can afford. Subsequent payments could become so exorbitant that foreclosure may loom.

Beware of Enticing Interest Rates

Adjustable rate mortgages often have teaser rates that lure in unwary home buyers. These unbelievably low interest rates inevitably climb. This low rate usually ends after six months or one year, and then the rate adjusts according to the mortgage's index. Generally, ARMs have monthly, yearly or lifetime caps that limit the allowable increases. Don't even contemplate a mortgage that does not have a cap. Caps safeguard homeowners from extreme increases in monthly payments; however negative amortization can occur due to not significantly reducing the amount of principal owed.

Examine a Potential Loan's Adjustment Period, Index and Margin

There are three additional items to look at with an ARM, the loan's adjustment period, index and margin. The adjustment periods of an ARM ranges from monthly adjustments to yearly adjustments and various other increments. ARMs with yearly adjustments offer more safety, making certain of fixed amounts for at least a year's time, while ARMs that adjust more frequently can be nerve-wracking.

The index of your floating rate mortgage fixes to the variance of the interest rate. Among these indexes are Certificates of Deposit, Treasury Bills and the London Interbank Offered Rate Index or even the bank's own index. Learn the index your loan is tied to and its performance as you decide whether to go with ARM or not. The margin is the amount your lender will receive as profit from your loan.

Variable Rate Mortgages Appeal to Short-term Homeowners

There are some good reasons to get a variable rate mortgage. If you know that you will be receiving a pay increase soon or promotion, you know you'll be able to handle the higher rates. Also, residing there only a couple of years, is another good reason to go with the lower ARM interest rate. However, if you plan to keep the property more than 5 years, another type of loan would be more advisable. You may want to consider a convertible or hybrid loan which begins as adjustable rate mortgage and changes to a fixed rate mortgage at a later date.