An adjustable-rate mortgage (ARM) may seem simple at first:
a mortgage with an interest rate that increases over a period of time. In reality, however, there are several
important things to understand about an adjustable mortgage that can be helpful
to the home buyer, especially the first time home buyer on a limited budget.
Typically, an adjustable-rate mortgage has an initial
interest rate that is lower than a fixed-rate mortgage. In addition, they come with a period of time
when the initial interest rate will remain the same before it can increase.
Usually, adjustable rate mortgages come as 1/1 ARM, 3/1 ARM,
and a 5/1 ARM. This means that for the
first three or five years, the lower interest rate remains the same. After that, the interest increases every year
up to a predetermined maximum.
As was stated earlier, the advantage of an adjustable-rate
mortgage is the fact that loan comes with a lower interest rate for the first
few years. However, people can get
themselves into trouble with an adjustable-rate mortgage by forgetting that the
interest rate will go up.
A person can afford more house during the first few years of
the loan. However, unless their income
increases—or their bills decrease—they can quickly get themselves to a place
where they literally cannot afford their mortgage after a few years.
The key to an adjustable-rate mortgage is to use the lower
initial interest rate to assist with the transition from apartment living to
the expense of owning a home. It is not
an excuse to buy more home that your wallet can realistically afford.
No-Doc Loans
A no-doc loan is actually what it sounds like: a loan that
requires literally no documentation from the borrower. These types of loans are for people who want
to guard their privacy by not having to give two years worth of tax returns, or
divulge W-2’s and 1099’s to a mortgage broker.
Of course, with every advantage comes a disadvantage. The downside to a no-doc loan is that a very
high credit score is required. Because
the lender only has the value of the property to be purchased and the credit
score of the borrower, the credit score becomes the central focus of the
lending criteria.
A person with less that absolutely perfect credit probably
should not attempt such a loan.