However, one also has the option to pay the minimum monthly payment, or the fully amortized amount due.
The advantage of negatively amortizing loans is that one can control cash flow with a relatively stable payment, take advantage of low interest rates relative to the market at any given time, and pay back the money borrowed today at a depreciated value years from now because of natural inflation.
With most ARMs, the interest rate can adjust every 6 months, once a year, every 3 years, or every 5 years. The interest rate on negatively amortized loans can adjust monthly. A loan with an adjustment period of 6 months is called a 6-month ARM, with an adjustment period of 1 year is called a 1-year ARM, and so on. Most ARMs offer an initial lower interest rate than the fully indexed rate (index plus margin) during the initial period of the loan, which could range from 1 month or a year or more.
Fixed-period ARMs
With fixed-period ARMs typically result in 3-10 years of fixed payments before the initial interest rate change. At the end of the fixed period, the interest rate will adjust annually. Several types of fixed-period ARMs exist, including 30/3/1, 30/5/1, 30/7/1 and 30/10/1. These loans are typically linked to the 1-year Treasury securities index. Adjustable rate mortgages with an initial fixed period usually have a first adjustment cap. This cap limits the interest rate one pays the first time the rate is adjusted. However, first adjustment caps vary with type of loan program.
The advantage of these loans is that the interest rate is lower than for a 30-year fixed because the lender is not locked in for as long so their risk is lower and they can charge less. However, one still gets the advantage of a fixed rate for a period of time.
Two-Step Mortgage
Two-step mortgages have a fixed rate for a certain time, most often 5 or 7 years, and then interest rate changes to a current market rate. After that adjustment the mortgage maintains new fixed rate for the remaining 23 or 25 years.
Convertible ARMs
Some ARMs come with option to convert them to a fixed-rate mortgage at designated times, usually during the first 5 years on the adjustment date. The new rate is established at the current market rate for fixed-rate mortgages. The conversion is typically performed for a nominal fee and requires virtually no paperwork. The disadvantage is that the conversion interest rate is typically a little higher than the market rate at that time.
The other kind of convertible mortgage is a fixed rate loan with rate reduction option. If rates have dropped since the time of closing, it allows one under some prescribed conditions for a small conversion fee to adjust the mortgage to the current market rate. Generally, the interest rate or discount points may be a slightly higher for a convertible loan.
Graduated Payment Mortgages (GPMs)
Graduated payment mortgages have payments that start low and gradually increase at predetermined times. A lower initial payment allow one to qualify for a larger loan amount. The monthly payments will eventually be higher...
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