San Diego, CA (PRWEB) March 27, 2014
LoanLove.com is a borrower advice website that provides detailed insights into the mortgage industry in a fun and entertaining way. The team at LoanLove.com is devoted to help empower both first time and experienced homeowners with valuable resources, first-class knowledge and connections to top-rated industry professionals and has the mission of helping consumers and borrowers to obtain the latest information on mortgage lending news, the real estate market and the U.S. financial landscape in order to help them obtain a home loan that they will love. Recently the loan advice website released a guide that looks the 5/1 ARM (adjustable rate mortgage) and explains some of the advantages and disadvantages of this loan option.
The new guide starts by saying, “The 5/1 ARM has become increasingly popular in recent years, primarily because of its initial lower monthly payments. In a 5/1 ARM (adjustable rate mortgage), the consumer pays a relatively low interest rate for five years (or 60 months), after which the interest rate will adjust to a higher level and will readjust annually until the loan is paid in full.”
The article explains that there are a number of situations where choosing a 5/1 ARM might be good choice. For example, if the home buyer expects their income to dramatically increase within the next five years – such as if a student is expected to have their degree conferred within five years; in this case the possible increase after the 60 months is up may not be a concern. Another situation that might be cause to take out a 5/1 ARM is if the home buyer expects they will be moving within five years. They will be able to enjoy a low monthly payment, knowing that they will be moving before the initial term expires and the loan readjusts to a possibly higher rate.
Another reason a borrower might want to choose a 5/1 ARM is if they have a less than perfect credit history. Some lenders are more willing to write loans with a shorter term to borrowers who do not have perfect credit ratings. Loan Love advises those who fall into this category to practice good credit habits to repair their credit so that they are able to refinance favorably at the end of the initial loan term. Those who need breathing room in their budgets now, but would likely be able to refinance to a more stable loan option down the road.
The Loan Love guide goes on to say, “Although the 5/1 ARM can be a great loan for many individuals, there are significant risks that are worth noting:
- Your payments will increase significantly at the end of the initial five-year term, so your projected income must be able to handle the increased monthly payment.
- There’s no way to predict where interest rates will be in five years when the loan readjusts; if rates are significantly higher, you could be in for a much higher payment – even higher than you can comfortably afford.
- After the initial adjustment, the loan will continue to adjust each year. That means that each year, you’ll have a new – and perhaps higher – monthly payment to make. Of course, that also means that if interest rates fall, your payment could be lower.
- If you plan to refinance at the end of your initial term and you have poor credit, you may be unable to refinance or you may be forced to accept a much higher interest rate than you would have had using your credit data from five years earlier.”
To find out more about this loan option, click here to read the full guide at LoanLove.com.