by James Garton

Created on: June 14, 2010

Let's take a look at the pro and con to getting and adjustable mortgage (ARM) as compared a fixed rate. The FHA has several variations of the adjustable rate mortgage so, a home buyer should have an understanding of what type of ARM they are getting into. Not everyone should finance their home using an ARM. However, for the right buyer the ARM could be a useful financial tool.

Before we point out the pitfalls and dangers of the ARM, let's get a clear understanding of what the ARM is.

Definition of the Adjustable Rate Mortgage (ARM):

Adjustable rate mortgages (ARM) is linked to a fluctuating interest rate, that is based on a particular index, such as the LIBOR Rate. With an adjustable FHA mortgage, you will find limits put on how high the rate can climb. These caps are put in place to protect the homeowner.

Adjustable rate mortgages are subject to annual increases unless they have a fixed period. This fixed period is usually at the start of the loan and can range from a few months to a few years. An added safeguard are lifetime rate caps that max out how high the rate could climb.

Fixed Rate Mortgage:

The safest mortgage is one that comes with a fixed rate. You know how much your rate is when you purchase the home and that rate remains the same for the entire life the mortgage. The most popular fixed rate mortgage is the 30-year term, but many home buyers that can afford to, will go with a 15 year fixed.

The Benefit of An Adjustable Over A Fixed Rate:

If you anticipate increased income in the next few years, or your only going to remain in a home for a few years or waiting for rates to drop so you can convert to a fixed rate, then an ARM may work best for you. What has caused many to get into trouble using an ARM is risk taking and speculation.

Buyers that are eager to get into a home they can't afford are lured into the low monthly payments the ARM provides. Not considering the future jump in payments, many find themselves facing foreclosure when the market turns against them. The ARM can be a great tool for the right buyer, but those who use it with a gambler type mentality always go broke.

Buy With Your Head Not Over It:

Working with a professional real estate agent and mortgage specialist, will help you shop for the best rate and prices. Keep in mind that both of these professionals make a commission on the amount of your home purchase. Don't let anyone talk you into buying a home that is over your head. It's easy to get caught up in the dream of home ownership, but buying a home you can't afford will quickly turn into a nightmare.

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