Are Adjustable Rate Mortgages Worth It?

It is surprising that a study would find an option adjustable rate mortgage (ARM), the best mortgage available. The August 2007, Columbia University and New York University study found that in an optimal environment, an option ARM or a combination of an interest only mortgage with a home equity line of credit (HELOC) work best. The authors of the study conclude that financial gains from these types of adjustable mortgages compared to traditional mortgages are much greater for people who buy expensive homes given their income or make a small or no down payment.

According to the new study, in a perfect world, an option ARM works more efficiently than any traditional mortgage. We are already aware of the traditional mortgages, such as 30-year, but let’s look at what an option ARM is. An option ARM home loan gives you the flexibility of making one of quite a few possible monthly mortgage payments to better manage your monthly cash flow.

Many option ARMs offer low introductory teaser rates which allow you to pay extremely low initial monthly home mortgage payments and low qualifying rates enable you to qualify for more home. You have access to a minimum payment option that can keep monthly mortgage payments within your means.

Also, the Option ARM, usually has at least two fully amortized payment alternatives, leading to a faster mortgage loan payoff. Furthermore, you can pay off your loan on schedule; build up your equity faster by making fully amortized payments based on a 15-year or 30-year loan.

In some instances, you are able to make additional principal mortgage payments to reduce your future mortgage payments. Option ARM home loans offer high degree of flexibility programs which permit minimum payments in the initial years.

However, minimum payments in the early years could lead to sudden increases in your monthly mortgage payments later. Option ARM loans have four major types of payment options: minimum payment, interest-only payment, fully amortizing 15-Year payment, and fully amortizing 30-Year payment. A minimum payment option usually sets your initial interest rate for the first 12 months, thereafter your payment changes annually. However, if you continue to make minimum monthly payments, the unpaid interest (deferred) will keep adding to your mortgage principal.

The interest only mortgage payment option doesn’t lead to principal reduction. You can only choose this payment option if the interest only payment exceeds the minimum payment option. Also, your monthly interest-only payment may adjust every month based on changes in the ARM index. So if interest rates increase, your monthly payments increase, conversely, if interest rates drop, so do your monthly payments.

The last of the option ARM payment choices is the fully amortized mortgage. In this form of monthly mortgage payments, you pay both principal and interest, in order to maintain a proper home loan schedule. Most plans have a choice of 15 year or 30 year mortgage payments.

The last few months have seen much turmoil in the housing and mortgage markets with regards to subprime mortgages, adjustable rate mortgages, rising foreclosures, oversupply of homes, and tightening home loan lending practices. This is the consequence of living in an imperfect world, the study suggests an “optimal” or perfect world for option ARMs. Recently, homeowners have been doing mortgage refinance of their current ARMs to fixed rate mortgages. The study suggests that option ARMs can work optimally only if, borrowers can maintain “self-control”, are finically disciplined. Ultimately, this type of program can only work for fiscally disciplined homeowners, who have extensive and expansive consumer mortgage education.