In recent years United States and world markets have been dealing with the effects of a burst real estate bubble. Its rippling effects can still felt by one if they are trying to purchase or refinance real estate property. One can constantly hear news about deteriorating real estate market conditions and wonder what were the real causes behind these conditions? Overinflated appraisals and lax standards for subprime mortgages are the main reasons for current housing market conditions, because these factors artificially inflated real estate bubble.
Is the Adjustable Rate Mortgage products evil or just miss understood? There are several major differences between fixed rate mortgages and Adjustable Rate Mortgages (ARM). Major difference to consumers is expressed in the way how in payments of principal and interest is calculated and what happens to the interest rate throughout life of the loan.
As defined by The Federal Reserve Board (2007) “Adjustable-rate mortgages are loans with interest rates that change. ARMs may start with lower monthly payments than fixed rate mortgages, but keep the following in mind: your monthly payments could change. They could go up, sometimes by a lot, even if interest rates don't go up. Your payments may not go down much, or at all even if interest rates go down. You could end up owing more money than you borrowed even if you make all your payments on time. If you want to pay off your ARM early to avoid higher payments, you might have to pay a penalty.”
Adjustable Rate Mortgages works the following way: borrower starts with a lower monthly payment and lower interest rate in the beginning of the loan, their payment can be interest only payment for a fixed period of time, after the introductory rate expires and mortgage rate adjusts, on basis predefined by mortgage note, to one of the two indexes Constant Maturity Treasury (CMT) or London InterBank Offered Rate (LIBOR). Adjustments occur regularly after the introductory period;...