Question

what is the best for a borrower whereas if its best capped, not capped, or capped with negative ammortization

explain the risks with ARMs and The risks for fixed rate mortgages and then give a 2 reasons why a borrower might still use a ARM.

thank you

Answer 1

The various types of risk that are associated with ARM's are:

1) Interest rate risk: If interest rates are rising our payments could increase after the adjustable period begins due to that some borrowers might have trouble making the larger payments.

2) Repaying Penalty:Some ARMs have a prepayment penalty. This is a fee that can be charged if you sell or refinance the loan. If you plan on selling the home or refinancing within the first five years of the mortgage, you should choose a lender who offers a loan without this penalty.

The risk involved in Fixed rate mortgage is future that its interest rate is higher than either an adjustable-rate loan or ARM Loan. That makes it more expensive if interest rates remain the same or fall in the future.

The two reasons why borrowers still use ARM are :

1) The first main reason is decrease that ARMs typically start with a lower interest rate than fixed-rate loans. A lower rate results in a lower monthly payment, making cash flow more manageable. If rates fall, your rate may even decrease.

2) Another reason is that there is a wide range of types of ARM loans that can be selected to fit the individual needs of a home buyer. Hybrid ARMs allow the home buyer to select a term of fixed rate before the rate starts to adjust. Hybrid ARMs designated as 3/1, 5/1 or 7/1 have the initial rate set for a period of 3 5 or 7 years. There is huge flexibility in selecting the ranges.