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Use an Online Mortgage Calculator to Understand ARMs

from: Mortage & Debt Facts

Adjustable rate mortgages still exist, even with the bad rap they’ve received from the mortgage crisis. They are a specialty product that were not meant to be used by everyone, just by a few people who might benefit from the adjustable rate. People who weren’t planning on spending more than five year’s in their home or people who had income that was rising were the traditional buyers of ARM loans. The reasons for this are that the loans adjustable terms are difficult to assess unless you have done your research with an online mortgage calculator. If you don’t know what you are signing with an ARM loan, you shouldn’t get this type of loan.

Get the Facts

There isn’t just one type of adjustable rate mortgage, so you will need to understand the product you are investigating before you plug any numbers into a mortgage calculator. You will need to know how long the initial payment is fixed and when and how often the rate is adjusted. For instance, in a 3/1 adjustable rate mortgage, you might have a period of three years and then it adjusts every year thereafter. There are also 5/1, 7/1, and 10/1 ARMs. There are also hybrid mortgages and ARMs that are tied to different indexes. This can make understanding the product you have a bit more complex. Try to get a good idea whether you are dealing with a classic ARM or whether this is a hybrid product. Also, make sure you know how long the initial rate lasts as some offer teaser interest rates that quickly fly by, some in less than a year.

You will also want to know if the adjustments are capped, so that they cannot go past a certain amount. This is very important to be able to see your best and worst case scenarios with a mortgage calculator. The caps are usually set as a percentage of the previous payment amount or sometimes as an interest rate hike cap. The thing to understand is that even though the interest rate increase may be capped the first year, and nothing happens to adjust the rate the following year, you may still be charged an increase from the previous year’s cap. It’s because the lender assumes you owe and they cut you a break on the previous year. This means that you won’t really be able to figure out exactly what you owe each year on the mortgage calculator, but you can get a best case and worst case scenario from the mortgage calculator.