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ARM Mortgage and Property Tax Implications

2010-05-01 02:58
When it comes to mortgages or financing upon the purchase of a property there are many options available according to the buyer's plans and financial situation. Today we're going to talk about one of the most controversial types of mortgages out in the market today, the adjustable rate mortgage (ARM).

As the name implies an adjustable rate mortgage is a type of home loan that varies according to several indices; predicting the fluctuation of such indices is impossible. If there are so many conditions and variables for this type of home loan why would a person opt to work with such payment program? -- you may ask, the fact of the matter is that ARMs are not the terrible monster most people describe, there are many good reasons why a person may choose to work with an adjustable program instead of a fixed rate loan. The following list will give you some very good reasons about why an ARM can be a smart decision:

-- Low initial payments -- Affordable terms for new property buyers -- Convenient terms for investors

An adjustable home loan will always provide a lower payment when compared to a fixed rate loan, new homebuyers will normally feel attracted to this type of program if they are making plans of saving money whilst they have low payments and a fixed term and will refinance once the fixed term is up.

Sometimes a person may not qualify to for a fixed rate loan because of the FICO score, if a fixed program were to be put together for a person with a less than perfect score the payments will not be affordable, so while the payments are fixed they will be so high that homebuyers will have no choice but to go towards the adjustable route.

Property owners who do not plan to stay in their residence for more than a couple of years can save money on mortgage payments if they opt to get an adjustable program which often has a fixed period with a low monthly payments.

When it comes to ARMs is of the utmost importance that the property buyer knows what's going to happen but what the plans are for the next few years because when a fixed or teaser term is up the monthly payments will adjust accordingly and this change can negatively impact the financial situation of the property owner.

Property Tax Implications

Now that we know that adjustable mortgages are good if they are used in a smart way we must also present the negative side of this type of loan in correlation with the property taxes when a person fails to refinance before the fixed period expires.

Property taxes are set by the local municipality; these taxes may increase without notice and are often calculated according to the value of the property and other factors. If a person holds an ARM until the time it starts to adjust there will be a double whammy effect, is because the property tax can also increase and make the adjustable situation even worse for the homeowner.

In some states, when a home is purchased from a person who owned it for 15 to 20 years the property taxes may double for the new owner when the escrow is recalculated, so waiting for a variable loan to adjust may not be the best idea when we consider that property taxes will also add to the problem.

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