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Disadvantages of ARM Mortgages

ARM mortgages or also called as adjustable rate mortgages are a type of mortgage that has fluctuating monthly payments. These payments increases or decreases depending on its two main factors: the margin and the index. Margin is the actual fixed amount that the lenders charge their mortgagers while index is the measurement used to determine future interest rate values. Indices can change depending on the status of the economy and the current index trends of the 11th District Cost of Funds Index or COFI, Certificate of Deposit or COD and Treasury Bills or T-Bills among others.

ARM mortgages have great advantages especially for mortgagers who are short in cash. The monthly payments of this type of mortgage are cheaper than traditional mortgages so people can easily budget their money wisely using this system. If the interest rates in the following years are low, mortgagers don't have to repay for the loss interest amount. Finally, mortgagers can easily convert from an ARM mortgage to a traditional one and vice versa depending on the current state of the economy.

Even if this type or mortgage has these benefits, it is has a lot of weaknesses. First, people are interested in getting this mortgage because of the so called teaser rate. The teaser rate is a very low interest rate given to mortgagers at the first months or years of the mortgage period, thus resulting to more affordable monthly payments. But here is the catch; once the first months or years have passed the real interest rate appears leaving mortgagers to pay huge monthly payments in an instant.

If mortgagers are paying with a low monthly interest rate and reasonable caps in the next years, then they are lucky. Mortgagers don't need to worry about getting additional income and they can easily allot some of their earning for other expenses such as tuition fees, electric and water bills and food. However, there in no denying that when the good season in the economy ends interest rates will start to rise up again and there is no interest limit applicable to stop it. In addition, not many mortgagers are knowledgeable to convert their ARM mortgages before it happens.

If the mortgager can't handle this scenario, he may ask the same or different lender to covert his existing ARM mortgage into the traditional one. But no matter how easy it seems; lenders can still deny the request if the mortgager does not pay monthly payments in whole, does not pay on time in the past years and has a bad credit history. Once the lender denied the request, the mortgager has to pay the increasing monthly payments; and if he can't pay anymore, then it could result to his property being foreclosed.

In addition, paying the monthly payments in full does not mean that the mortgager gives enough money for the mortgage loan. If a mortgager pays the maximum monthly payment for the month, then the interest rate is not charged from him. Mortgagers can easily translate it as a good thing except that this unused interest rate is carried over to the remaining mortgage balance and thus leaving him more debt than before just like a credit card.

This list of the disadvantages of ARM mortgages is not meant to discourage people from getting an ARM mortgage. Instead, it has to be served as a guide to help them understand the concepts behind this mortgage and what to expect once they get one. As the mortgager, you have to decide if this mortgage truly suits your income and lifestyle or else you dream home will be gone after a few years.