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How an Adjustable Rate Mortgage (ARM) Traps You Into a Lifetime of Mortgage Payments?

Aug 26, 2008
If you are paying 40% or more of your paycheck to your mortgage, there is nothing left to invest or to enjoy your life. Here is where it gets worse. Your ARM is designed to trap you into a lifetime of payments... That does not make sense right? You plan to refinance your mortgage after your ARM expires and when that's done you plan to take out a 30 year mortgage payment.

Let's see how the banks have designed an ARM.

Let's assume you have a $200,000 Adjustable Rate Mortgage. The interest rate is 6.5% and the ARM adjusts in 5 years. The monthly installments are $1264.14 (see Bankrate). At the end of the first 5 years you end up spending the following: Total Repayments: $75,848, of which $12,778 goes to principal and $63,070 in interest. So you pay five times more in interest than principal only in the first 5 years.

Now what do you plan to do after the first 5 years, when you ARM expires?

You probably move to a new home and take out a 30 year mortgage. Here is an important question. How long will you have a monthly mortgage payment? Is it 30 years? As you can see it is 35 years. The first 5 years on your ARM then another thirty years on your fixed mortgage when your ARM expires.

Let's assume that when your ARM expires instead of taking out a 30 year fixed mortgage you decide to take out another ARM.

You can see the pattern right. You will end up spending 40 years of your paycheck for your mortgage. According to the latest statistics it is not uncommon for you to make a payment for 47 years.

You see it is not your fault.

The banks don't fully disclose the total time and cost of an ARM when you close on your home. So here is where it gets really interesting. Let's assume that you take 35 years to pay off the $200,000 mortgage. The Repayments over 30 year mortgage is $455,090. The total repayment over 35 years for the same mortgage is $530,938. If you extend your mortgage 5 years by taking out an ARM you end up spending over $75,848.

I know you may be thinking to yourself right now that your repayment and interest rate on the ARM is lower than a 30 year mortgage. What you fail to realize it that though the interest rate and your monthly repayments are slightly lower the banks make up for it by charging you interest for a longer period of time.

Let's face it, there is a reason they have designed the ARM and in the long run it will cost you more. There are ways to still use an ARM and still be ahead of the bank and pay off your mortgage sooner. Imagine what you can do with that kind of money in your own pocket.

It is easy to get trapped into an ARM thinking that it is only a 3, 5 or 7 year mortgage. The reality is very different. If you have an ARM go directly to EquityExcel. Find out for yourself the impact it has on your paycheck each month and the mortgage accelerator calculator will reveal simple steps you can take that will help you to still pay this off faster without spending more or refinancing.

This information will put more cash in your pocket.
About the Author
Whether you have a Fixed Rate Mortgage or ARM and if you would like to know if you are trapped into a lifetime of mortgage payments, go directly to href=http://www.eqxl.com
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