Disadvantages of ARMs

The primary disadvantage of the ARM loan is obviously the adjusting interest rate. The caps provide some degree of protection; however, any rate and payment adjustment still hurts.

Also, if the ARM starts with a teaser rate, then the new adjusted rate is bound to be higher—even if the market rate does not increase. Many borrowers will look at the first periods of the ARM—when the teaser discount is still in effect—to be the ARM loan's honeymoon. Eventually, however, reality must beckon.

A second, albeit minor, disadvantage of the ARM loan is that the mortgage insurance, if any, will be slightly higher than the fixed-rate loan. The mortgage insurance premiums for ARM loans will normally be 10%-20% higher than the mortgage insurance for comparable fixed-rate programs.

The reason for this is because ARM loans do tend to carry more risk for the borrower. Remember that ARM loans allow the borrower to share more of the loan's risk with the lender. The mortgage insurance is merely a reflection of that increased borrower risk, which is borne out by higher default levels of ARM loans.

Nevertheless, ARM programs have their moments. The key for the home buyer is to use short-term ARM loans for short-term purposes.

We hope that you've found our Mortgage and Real Estate Resource helpful and informative. We welcome all comments, critiques and suggestions; please send emails to [email protected]. Remember that whether your are buying a home or an office building, you are investing in real estate. As with all investments, the best investors are those who can gather the most knowledge, tools and resources. Regardless of whether you use our lending services, please spread the word about our resource center to anyone you know who may benefit from our site.

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