Adjustable Rate Mortgages in a Rising Rate Environment

When considering an Adjustable Rate Mortgage (ARM) in a rising interest rate environment, EverBank (www.everbank.com) offers these top 10 tips to home buyers. ARMs offer specific financial advantages and have become the option of choice for many sophisticated borrowers in a variety of interest rate scenarios.

1. Know the Different Types of ARMs - With traditional ARMs, mortgage rate adjustments generally occur monthly, semi-annually or annually based upon some market rate index. Hybrid ARMs allow borrowers to select an initial period during which the interest rate will remain fixed and after which interest rates will fluctuate just like a normal ARM. Because many borrowers live in their homes for less than seven years, hybrid and standard ARMs may be wiser products than traditional 30-year fixed rate mortgages.
   
   
2. Think About Your Entire Financial Picture - Borrowers with assets that appreciate in rising rate environments may have more risk tolerance and/or be able to justify the increased cost of higher mortgage rates with appreciation on those assets.
   
   
3. Consider the Reinvestment of Cash Flow Savings of ARMs vs. Fixed Rate Mortgages - By reinvesting the savings from lower ARM payments, borrowers can also benefit from compounding interest on those investments.
   
   
4. Increase Your Borrowing Capacity; Reduce Future Transactional Costs - Because ARM loan monthly payments are lower during the initial period, a lender can usually qualify a borrower for a larger loan amount than a fixed rate mortgage would allow.
   
   
5. Remember to Factor in Caps - Most ARM loan products feature rate adjustment protections that limit the extent to which an ARM may be adjusted at its adjustment period (periodic caps) and also over the full term of the loan (lifetime caps). Different loan products will offer different combinations of protective caps and it is important to look at each one in the context of both the current and expected rate environments that will impact your ARM adjustments.
   
   
6. Consider the Benefits of a Revolving Line of Credit - As home equity line of credit (HELOC) products have grown in popularity, some lenders now offer adjustable-rate, first mortgages that include the benefits of a revolving line of credit. Unlike a traditional mortgage, borrowers can still access funds after they pay their debt down through the revolving line of credit for any reason when they need the money.
   
   
7. Understand Your Risk Profile - Borrowers who have a low tolerance for risk, cannot afford future payment adjustments or plan to stay in their property for over five years may be wise to avoid the risks associated with ARMs. Borrowers with some cushion in their income, those expecting future income growth, or those with other investments may benefit from using ARMs in a rising rate environment.
   
   
8. Choose the Right ARM to Fit Your Needs - Borrowers also need to carefully consider what their own financial situation will be at the time the ARM adjustments begin. You must locate an ARM product that offers appropriate security and limits with the right protections and caps. You must consider the rate environment that is likely to exist at the time your ARM's initial period ends.
   
   
9. Don't Forget You Still Benefit When Rates Go Down or Stay Close to Current Rates - Borrowers that select an ARM loan will automatically benefit from lowered rates through regularly scheduled rate adjustments without any added cost of refinancing.
   
   
10. Be Smart and Know Your Habits - If you have a history of not controlling spending or have an unsteady job situation, an ARM may not be appropriate for you. If the loan product is matched carefully with your personal financial goals and needs and then managed carefully, an ARM may be your best financing option.
    
    

Patrick McEnerney manages the various mortgage production operations of the EverBank family of companies. For EverBank's full report on tips when considering an Adjustable Rate Mortgage, please contact Peter Robbio (ext. 116) at (703) 683-5004. EverBank Financial Corp is a private holding company headquartered in Jacksonville, FL. With approximately $3.0 billion of assets, 1,400 employees and 400,000 customers nationwide, EverBank is one of the industry's fastest growing financial services firms. EverBank serves customers nationwide through EverBank's National Banking Group. Visit EverBank on the web at EverBank.com

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