When consumers begin shopping for a home loan they are often presented with the option of using an adjustable rate mortgage. An adjustable rate mortgage (also known as an ARM) can be a great way to buy a home but it can also be a horrible mistake that can lead to foreclosure or even bankruptcy. The difference between joy and disaster is often in the mortgage contract itself.
When consumers hear the term “adjustable rate mortgage” they should understand that this is a very broad term indeed, and that it can mean many things. There are, literally, dozens of varieties of ARM’s available to home shoppers, and knowing the good ones from the bad ones should be a home buyer’s first concern.
In general, an adjustable rate mortgage begins with a set rate of interest for a specific length of time. This first rate is usually lower than what consumers can find in the fixed rate market at the same time. This lower rate is the inducement to take the ARM over the fixed rate products.
At some point in time, and this will be spelled out in the contract, the lower rate will be adjusted. The adjustment can go up or down, but normally goes up, as you...
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