Which ARM is the Best One for You?

Most borrowers now know that ARM stands for Adjustable Rate Mortgage, or a home loan that has an interest rate that changes every certain period. This type of mortgage became a necessity when interest rates became very volatile and lenders needed to protect themselves against this volatility.

This was not an issue until the last decades, since interest rates did not change as much years ago.

ARMs are for thirty years usually, with interest rates fluctuating in the course of those thirty years. For any borrower, when the rate changes is usually more critical than the term of the loan. Unless, of course, the borrower knows he will be in the home for an extended period, in which case the longer term would be better since it will avoid any refinancing and the relevant charges.

The five year adjustable rate mortgage is usually the best type of ARM for borrowers. You do not want to take a chance on an ARM that changes the interest rate more frequently. If you obtain a loan at a low interest rate of 6%, you can keep this rate, but if you decide upon an ARM that adjusts frequently (usually cheaper in the beginning), you risk perhaps 8% rates in the long run.

If, on the other hand, your adjustment period is once a year, you will pay the 8% for the year(s) it holds before you are able to go to the lower rate. Luckily, many ARMs have a version of top interest rate cap as a part of the agreement.

You need to also take into account the number of years you plan on being in the home. If you will only live there a few years, the initial interest is the main concern. If you will live there for ten years or more, you have to worry about the changes at each reset period. Normally you cannot get an adjustment period of over 7 years.

You also have to know which benchmark is being used to set the rate: government bonds, the LIBOR, CDs or others. Each of these has benefits and disadvantages, depending on the outlook of the homeowner. Be aware that any ARM with a frequent adjustment period will affect your monthly payment frequently.

If budgeting is an important component for you, having your home loan payment bounce up and down usually not is not a good idea.
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