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Compare Adjustable Rate Mortgages (ARMs) with Fixed Rate Mortgages (FRMs) - Interest Only and Pick A Payment Loans - Alternative Financing

March 22nd 2006

Compare Adjustable Rate Mortgages (ARMs) with Fixed Rate Mortgages (FRMs) - Interest Only and Pick A Payment Loans - Alternative Financing

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There are many choices in the mortgage marketplace, and it is important to choose the right type of loan. Choosing the right loan could save you thousands over the term of the loan.

There are a few basic options including an adjustable rate mortgage (ARM) and a fixed rate mortgage (FRM). The ARM can be a powerful tool, sometimes offering borrowers lower initial payments. This makes it easier for borrowers to qualify for larger loan sums.

If the borrower expects interest rates to rise, a FRM may be better. If qualifying for a loan is a problem, there are a couple things that can help protect borrowers when choosing a ARM. For instance, if interest rates do go up, you want to be able to cap your maximum interest rate and also the amount your interest rate can increase per month. Make sure your ARM includes both types of interest rate caps.

As home prices soared so have the alternative financing options. According to the Federal Trade Commission (FTC), in the year 2000 alternative financing accounted for less than 1% of the financing. Today, they comprise nearly half of new loans.

These nontraditional loans include “interest-only” loans and payment option adjustable rate mortgage (ARM) loans (or “pick-a-payment” loans). These new mortgage products may benefit the consumer, but there are some caveats. Alternative financing options have made it possible for first time buyers to buy homes in a higher priced market where a traditional mortgage would have failed. They may also benefit consumers with uneven pattern of income or those anticipating a rise in income.

It is important to understand the details of the loan before you choose or sign on the dotted line. According to the FTC, these loans could result in “payment shock”. Also, some loans may yield a negative amortization, meaning the loan balance could increase, not decrease.