The adjustable rate mortgage loan is a loan for the rest of us. It is the only type of loan available for “subprime” borrowers – that is, any of us that don’t meet the credit score mark – and for people who need to finance more than eighty percent of the house. The adjustable rate mortgage can also be a good financial decision for people whose careers are growing and who may be facing a mobile future.
An adjustable rate mortgage (ARM) maintains a low initial payment for an initial period – usually three, five or seven years. These loans are known as 3/1; 5/1; and 7/1 ARMs. The monthly payment then adjusts upward as the interest rate rises, and is adjusted annually based on a money market index. A loan of this type can be a good bet for someone who is planning to move in five years – the low payments in a 5/1 will coincide nicely with a planned sale of the home. People who want to buy the most expensive house within reach can extend that reach with an ARM.
How Large a Mortgage Loan Can I Afford?
From a mortgage lenders perspective, there are a few financial guidelines that usually come into play. Your monthly housing costs should probably not exceed 32% of your gross monthly household income. Housing costs include mortgage payments, inspixaurance, taxes and utilities.
Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments. This is the reason for reducing credit card debt as much as possible before calling on the lending institution. While these formulas are no longer hard and fast, a calculation of some sort regarding total indebtedness will come into play. The less you owe, the more you can borrow – and at better terms.
From your perspective, other factors are going to include the cost of assembling the down payment and the eventual impact of an ARM when the monthly payment adjusts. It is important to consider the eventuality of an adjusted ARM payment, even if you intend to refinance or you plan to move and avoid the higher payment level. Sometimes those plans don’t work out.
Most ARMs have interest caps, but the payments can climb steadily nonetheless. The more exotic ARMs such as option ARMs and balloon payment loans carry risks of their own as well. To some degree, affordability is a combination not only of how much you can afford to pay in the first month of the loan, but the amount of risk that you’re willing to take on as well. That risk can be betting on a good refinancing rate in five or seven years, or on a seller’s market when it’s time to move, or on a growing household income.
Solving the Mortgage Loan Puzzle
There are no dumb questions when you are mortgage shopping. Too many people sign on to mortgages they don’t understand. Either they are dazzled by the new dream house or they don’t retain all the financial minutiae that is thrown at them, or the mortgage isn’t properly explained by the broker. So maybe mortgages are like medicine – a second opinion makes sense. That’s why we supply consulting services on this site, and why multiple mortgage options and home mortgage lenders work in partnership with us. It’s the biggest investment most of us ever make – so keep asking until you’re sure it’s the right deal and it’s one that you fully understand.…