What is an ARM Mortgage?

Purchasing your home with an adjustable rate mortgage seems like a reasonable thing to do. That is, until you realize that the 5 year period of low interest rate will be over after 5 years. After 5 years with a good interest rate the ARM's tend to rise very rapidly in a manor that the industry has termed to "explosion" or even "meltdown". A rise of two or three percent doesn't seem like a lot, and it isn't, until you realize that that is two or three percent of your house.

Despite the fact that interest rates on 30-year mortgages are at a historical low, people are still enthralled by the idea of a lower monthly payment, and this has led them to the ARM mortgage. The ARM mortgage has also convinced a significant amount of people that should probably be renting that they too can live the American dream of owning a house. It's true, these people can live that dream, but only until the interest rates start to rise. After that they can only live the dream of a smoothly operated foreclosure.

The banks have handed out sub prime (mortgages with very bad terms to people who have lack a good credit history) to a very great number of people. As the number of people that cannot pay their newly increased monthly payments increases the rate of foreclosure will rise. Eventually, this will cause the price of real estate to correct itself back down to normal levels, but no one knows when this day will come.

With all of this sensationalist fuss about ARM mortgages and a coming "mortgage meltdown" or even "explosion" there are a few facts that are clear. The banks have gave loans to people that will not be able to indefinetly pay off those loans. After their initial 5 year low interest period the increased rates will make home ownership impossibility for the people with the mortgage. We also know that unless, you plan on selling your home within five years (a bad idea) a fixed rate mortgage is probably the best choice for your. In fact, a 30-year fixed rate mortgage is probably the best choice for anyone right now.

If you have an adjustable rate mortgage, it's not too late for a refinance. It would be best to replace your ARM mortgage with a fixed rate mortgage as soon as possible. Your monthly payments might be slightly higher, but there will be no significant increase (or even an increase) in your monthly payments for the rest of the thirty year term. Don't assume that you will be making more money in the next five years!