Adjustable Rate Mortgage & Mortgage Insurance

If you own a home, or looking to purchase a home you are probably familiar with the two main mortgage types. Those two types being the traditional fixed mortgage and the adjustable rate mortgage (ARM). A fixed-rate mortgage provides you with a fixed interest rate and payment for the life of the loan, typically 15 to 30 years. An adjustable rate mortgage, on the other hand, fluctuates throughout the life of your mortgage. They both have their benefits and drawbacks, so it is important to understand them both when selecting a mortgage that is suitable for your needs.

Many buyers are drawn by the initial low rates that adjustable rate mortgages offer. These mortgage types, commonly offer very attractive, initial mortgage rates. This is where it is important to not get tempted by the attractiveness of the initial interest rates inherit with adjustable rate mortgages. Most notably, if you plan to stay in your home for more than five years. It's important to note here that in proper selection of adjustable rate mortgages are causing numerous problems in the housing industry today. For many individuals, they purchased adjustable rate mortgages, because it was all they can afford during an escalating housing market. The thought was that they could always refinance when their initial low interest rate turned higher. This provides a very valuable lesson, as these individuals are learning the hard way that in declining housing markets, its next to impossible to get refinanced. So, the adjustable rate mortgage holder is really left with two choices, one to stick with the mortgage, even if the monthly payment doubles or even triples. Or the second choice to just walk away and foreclose on the home loan. Unfortunately, many homeowners have no other choice but to choose the latter and walk away from the American dream.

Fixed interest rate mortgages may come with a bit higher interest rate initially, but they are predictable, avoiding wide fluctuations. Fixed mortgages are not necessarily for the short term homeowner, as adjustable rate mortgages offer more attractive short-term rates. Adjustable rate mortgages were used to excess by house flippers during the housing bill. This allowed them to purchase a home with a very low monthly payment with the idea that they would sell the home shortly. This is, however, often easier said than done, especially in this real estate market, where homes are sitting on the market for long periods of time. These speculators did no favors to the housing market, as they were the catalysts for unsustainable housing growth.

Quite commonly during the housing boom, speculators were buying homes with 0% down payments. This was done by funding a home purchase with two separate loans, or piggyback type loans. Traditionally, mortgage lenders require private mortgage insurance for those individuals buying a house with less than 20% down payment. This mortgage insurance is almost always required when you don't meet the lender's down payment requirements. Mortgage insurance is insurance that protects your lender, should you default on your home loan. It really has no benefit to you, other than providing you with the opportunity to get into a home loan, with less than 20% down payment. This PMI insurance is completely funded by you for the benefit of your lender. Now, there are a few ways to avoid mortgage insurance. The most logical, is to prove to your lender that you're serious, by putting down a 20% or larger down payment on your home purchase.

Another is to rely on the equity growth of real estate, as your property value increases by 20%, you can submit your lender or request of the illumination of your mortgage insurance. Recent developments in the housing market are making that more difficult than ever, however, as lenders are implementing numerous loan restrictions due to the housing downturn. The most appropriate thing for you to do, is the right thing. Buy a home, the old-fashioned way with a down payment and the ability to afford the mortgage. This will ensure satisfactory homeownership for both you and your lender for a long time to come.