Step 2 : The Mortgage Part III

Anthony Pierpont
Anthony Pierpont

Anthony Pierpont

The final Mortgage we will talk about is the Adjustable Rate Mortgage, better known as the ARM.  This loan has gotten a bad name in the past few years because of its misuse and one of the causes of the past collapse of the housing market.  It is also one of the newest types of mortgages on the market today.  It hit the mortgage scene in 1982 when Congress passed the Garn-St. Germain Depository Instituions Act.  This mortgage was designed to help people afford homes during that time of very high interest rates.

How a ARM works is you start with a low interest rate, lower than the rate for a conventional loan, and that rate goes up every year, by a formula I will not attempt to explain.  Now the rate does not go up until the end of the loan but for a specific amount of time.  There are 3/1, 5/1, and 7/1 Arms.  This means the interest rate will go up for 3, 5, or 7 years at one year intervals.   So when using this type of mortgage you are doing one of two things.  One you are not going to stay in the home longer than the 3, 5, or 7 years or two you are betting the interest rates go down or at least not up.

So as you can see ARM’s do serve a purpose in our mortgage markets today.  It is import to state that they are a risk and that is the decision you must make.  You will pay more principal in the beginning of the loan than interest, unlike a conventional where much of the interest is in the beginning.  That said if you keep the loan and the rates go up and in the worst case scenario drastically go up you can find yourself paying much more interest on the loan than you thought at first.

So as you can see from this short article on the loan process your due diligence of it should take you more than 2 hours.  Decide between a conventional 15, 20, and 30 year loan.  Decide if FHA or VA is the way you want to go.  Finally decide if maybe an ARM is the best way with lower starting interest.  Good luck and if you have any questions please ask your loan officer.


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