The Adjustable Rate Mortgage loan is an excellent mortgage program that can be of significant help to those mortgage borrowers who know exactly how the program works. The ARM loan is quite complicated and works in a different way than one would normally encounter with a conventional fixed rate mortgage loan.
This is the reason why for a borrower who is not familiar with the Adjustable Rate Mortgage scheme; it is very easy for such a borrower to fall into mortgage default and subsequently owe more on the home loan than the value of his or her home.
One basic feature of the Adjustable Rate Mortgage plan that should help a lot of people but has rather caused many of ARM borrowers to become delinquent, because it is misunderstood is the Negative Amortization feature that comes with all ARM loans.
Most times, borrowers are happy to opt for Adjustable Rate Mortgage loans because of the fact that at the initial stages of ARM loans, the borrower makes reduced monthly mortgage payments to the lender. The main aim of this feature is to enable the borrower to gain a substantial amount of equity on the home. It also makes this loan suitable for individuals who are of the view that their financial power would be increasing with time.
Through the feature known as negative amortization, the borrower is expected to start of the process of repaying the loan by paying an amount of money far lower than the interest on the home loan. In effect, the borrower’s payment does not include the principal amount neither does it make up for the full payment of the interest. This means that, the unpaid interest accumulates and adds up to the principal on the home loan.
Without a firm background in the operations of the ARM loan, a borrower would not be able to use the program’s features as a way of making mortgage payments affordable. For example, for every month, the ARM borrower has the option of making a full mortgage payment of principal plus interest or an interest only mortgage payment or a minimum payment lower than the interest charged on the loan. Since the decision is the borrower’s to make, he or she can assess his or her financial conditions and then decide on which form of payment plan to use for that particular month. This is why the ARM loan is essentially suitable for people with unstable monthly income.
However, a borrower who does not know about these payment plans, may probably stick to the minimum payment option even though he or she may have the monetary power to make a full index payment. As the person continues to make minimum payments, the unpaid interest and principal gradually grows until the borrower is over shadowed with mortgage debt.
The Adjustable Rate Mortgage loan is not all about a year by year change in mortgage rates. Most borrowers only think about the possibility of obtaining a lower mortgage rate should rates in the market fall. They, therefore, opt for ARM loans without a full understanding of how the program works. With an ARM loan, you can work towards reducing your loan balance with each month’s payment or keep your loan balance the same or even keep it increasing even though you are making mortgage payments.