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Facts - Books - News    U.S. Facts Of Law:

Adjustable Rate Mortgage - ARM

An adjustable rate mortgage, or ARM, is a form of real estate loan whose interest rate and payment vary as the interest rate market changes.  An adjustable rate mortgage is also known as a variable rate mortgage.

ARM's have the advantage of offering a lower initial interest rate than a traditional fixed rate mortgage because the rate is based on the lower short term interest rate market.  When interest rates are falling or remain flat, the ARM is an advantageous type of mortgage.  Under these circumstances the interest rate and, thus, payments will remain low or even decline.

The ARM, or adjustable rate mortgage, is at a disadvantage when interest rates are rising.  Rising interest rates can quickly increase the rate charged on an ARM with a resulting increase in the monthly payment.  If the ARM includes a prepayment penalty, the borrower is faced with additional costs to move to a fixed rate mortgage and lock the interest rate.

Because of the initial low rate of adjustable rate mortgages, they have been sold to home buyers who may not have been able to afford the payments of a traditional mortgage.  These are the very people who cannot make their mortgage payments if interest rates even rise moderately.  Once interest rates start to climb, the rate on new fixed rate mortgages climb also making the switch from the ARM to a fixed rate mortgage out of reach for many ARM borrowers.

This situation occurred at the beginning of the new millennium.  Housing prices were climbing out of the reach of many buyers.  Interest rates were low and real estate and mortgage professionals started offering adjustable rate mortgages to these buyers on the premise that the an ARM had a slightly lower interest rate than a fixed rate loan and, therefore, had a payment the buyer could afford.  The thinking by these professionals was that if the interest rate increased on the ARM, the buyer could just refinance to a fixed rate loan or sell the home at what should be an appreciated value.

Unfortunately, what really happened should have been expected by these professionals and the banks and institutions that underwrote the mortgages.  Interest rates started to increase causing ARM payments to increase for many home owners.  As the real estate market softened, as it normally would due to rising interest rates, home owners with adjustable rate mortgages found themselves unable to secure fixed rate financing because of the increase in the interest rate and monthly payment for the loan.  So, they had no choice but to begin to dump their homes on the market.  This flood of inventory further depressed home prices.

As home prices continued lower, home owners with ARM's found they could not make their payments and could not sell their home for the amount remaining on their loan.  The result was a mass of home foreclosures.  Homes that have been foreclosed upon eventually are put on the market and this put even more pressure on the downward spiral of prices.

Interest rates continued to drift higher as the rest of the economy and commodity prices, including oil, increased fears of inflation.  The massive meltdown in real estate prices fed further by the foreclosure mechanism, pushed many home owners into just giving up on their home payments or filing for bankruptcy.  The net result has been a large group of people who have lost their American Dream and a large number of financial institutions who are now writing off hundreds of billions of dollars in mortgage losses with many of them going bankrupt themselves.


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Mortgage Rates Trend Higher For Monday Mortgage rates trend higher for Monday Several benchmark mortgage rates notched higher today. The average rates on 30 year fixed and 15 year fixed mortgages both were higher. The average rate on 5/1 adjustable rate mortgages, or ARMs, the most popular type of variable rate mortgage, also and more raquo

Mortgage Loan Rates Rose Sharply Last Week 24/7 Wall St.
24/7 Wall St. Mortgage Loan Rates Rose Sharply Last Week 24/7 Wall St. The MBA39s refinance index increased by 4 week over week, and the percentage of all new applications that were seeking refinancing slipped from 52.9 to 52.2. Adjustable rate mortgage loans accounted for 5.2 of all applications, up 0.2 percentage and more raquo

Mortgage Rates Climb Amidst Bond Market Selloff Mortgage Professional America
Mortgage Professional America Mortgage rates climb amidst bond market sell off Mortgage Professional America Freddie Mac reported a four basis point increase in the average 30 year fixed mortgage rate. and more raquo

Mortgage Rates Higher For Thursday Mortgage rates higher for Thursday Multiple key mortgage rates trended upward today. The average rates on 30 year fixed and 15 year fixed mortgages both moved up. The average rate on 5/1 adjustable rate mortgages, meanwhile, also rose. Rates for mortgages are constantly changing, but Average 30 year mortgage rates rise to 3.99 percentABC News Real estate daily market update: January 11, Mortgage rates shoot higher to begin the new yearChicago Tribune all 12 news articles raquo

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Facts of Law explaining the adjustable rate mortgage

Facts of Law - Adjustable Rate Mortgage