Adjustable Rate Mortgage
Advantages of an Adjustable Rate Mortgage
Adjustable rate Mortgages have taken a bad rap in the recent mortgage crisis. Financial pundits from all ends of the spectrum blame the irresponsible use of adjustable rate mortgages and hybrid adjustable rate mortgages for the growing number of homeowners who are criminals or in foreclosure on their mortgages.
It is unfortunate, as adjustable rate mortgages can offer real benefits to home buyers in many situations. Here is the scoop on the advantages of an adjustable rate mortgage.
With an adjustable rate mortgage is
There are many types of mortgages, but all of them fit into one of three different types – fixed-rate mortgages, adjustable rate mortgages and hybrid mortgages, which uses elements of both adjustable and fixed rate mortgages.
A fixed rate mortgage is one where the interest the mortgage is the same for the entire life of the loan, no matter what the market rates do.
An adjustable rate mortgage is one with an interest rate can fluctuate up or down. It is usually tied to a particular market index, and has special rules for when and how much the rate can be adjusted.
The most common type of hybrid mortgage is equipped with an initial low fixed interest rate that stays the same for two, three or five years, then adjust to the market and becomes and adjustable rate mortgages.
Advantages of an adjustable rate mortgages
There are several advantages to choosing an adjustable rate mortgage. Some of them are beneficial to only one type or the buyer or another, others are a benefit of all.
1st An adjustable rate mortgage can help you afford a bigger mortgage than a fixed rate mortgage.
Because Adjustable rate mortgages often have lower initial interest rate than fixed-rate mortgages, they allow you to qualify for a larger mortgage than a fixed rate mortgage. This means that you can buy a more expensive home because your monthly payments start smaller. If you are a young home buyer just getting started in a career, this can be a great advantage because it allows you to pay smaller monthly payments in the first year, when your salary is less.
2nd The first payments are lower than they would with a fixed rate loan, because interest rates are lower.
With a fixed-rate loans, lenders accept that if interest rates rise, they will do less money on mortgages than they would with an adjustable rate mortgage. The offset that 'loss' by charging higher interest rates on fixed rate mortgages, than they do on adjustable rate mortgages. This means that you start out with a lower monthly payment. As long as interest rates do not rise, you will continue to pay lower monthly payments.
3rd If interest rates rise down, your interest rate and monthly payments will adjust down automatically.
If you have a fixed rate mortgage and market interest rates fall significantly, you can only exploit that by refinancing your mortgage. Refinancing incurring prepayment fees and other costs that you avoid by to have a mortgage that adjusts automatically to the prevailing interest rates.
4th An adjustable rate mortgage can save you a significant amount if you only intend to stay in your new home for a short time.
Because interest rates and monthly payments that are expected to be significantly lower for an adjustable rate mortgage where the difference between the rate for a fixed rate mortgage and an adjustable rate mortgages (scatter) is significant, you can save several thousand dollars a year in the first few years.
To find out if an adjustable rate mortgage is right for you, it is important for you to consider all the facts about the loan. You should know the following about the mortgage you are considering:
- How often have price adjustment? Most adjustable mortgage rates adjust annually, but the adjustment period is up to each lender. Some may adjust as often as once a month.
- What is the cap on one adjustments? No matter how much it used index to determine adjustments increases, your mortgage agreement to cap how much interest rates may rise in a single adjustment.
- What is the annual cap on adjustments? If your mortgage adjusts more frequently than once a year, what is the most the lender can raise your interest in a single year?
- What is life cap adjustments? In addition to the annual cap, your mortgage agreement also spell lifetime cap on adjustments. Can you afford the monthly payment on the cap?
- What adjustment index has a lender uses to determine the excess? A lender can link adjustment rate to any index that you choose, and can get allowed to change the index under the terms of your loan.
- What is margin? The interest rate your lender charges will be a certain percentage of index. This is called a margin. You should know what the margin, so you can decide whether it is fair.
About the Author
Brain Jenkins is a freelance writer who writes about topics and financial products pertaining to the mortgage industry such an adjustable rate mortgage available from a mortgage company.