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An effective tool used by home buyers, ARM or Adjustable Rate Mortgages, offers a lower interest rate at the beginning of the loan and the risk of a hike in rates is shared by the borrower and lender. ARM, is ideal if you are certain about rising income expectations and short-term home ownership.
There are four basic aspects.
An ARM has in addition, safeguards like interest rate caps. This limits the amount of interest rate that can be applied to the payment during adjustment. Normally this cap would be about 2% point cap over the life of the loan.
ARM is ideal when it lends you buying power. You can opt to buy a property with a higher value and still pay a lower initial monthly payment. If you know for certain that you will reside in the house you are buying for a maximum of 5-7 years then ARM is the mortgage that will save you money. If you are prepared to take risks then ARM offers the greatest possible savings especially if the rate stays steady or declines over the years.
ARM is a calculated risk as there are no certainties. However if at the end of five years your plans change and you are about to continue in the same home for another 10 years then it is prudent for you to switch from ARM to a fixed rate mortgage.
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