Adjustable Rate Mortgages-What you Should Know
Adjustable rate mortgages can be an excellent choice when considering the purchase of a home. There are several facts you should know about adjustable rate mortgages. First, be aware with this type of mortgage the interest rate could vary up or down within a certain amount throughout the life of your mortgage loan. Usually adjustable rate mortgages have a +/- cap amount that prevents the interest rate from dropping below or exceeding certain amounts.
You should also know adjustable rate mortgages have advantages and disadvantages, just like anything else.
Advantages of an Adjustable Rate Mortgage:
- Interest Rates and Payments are usually lower on Adjustable Rate Mortgages than Fixed Rate Mortgages
- You can fix the rate on the mortgage for a period of time
- If interest rates go down, so will your payment
- You can qualify for a higher loan amount
Disadvantages of an Adjustable Rate Mortgage:
- Payments can go up over time
- May not be able to qualify for a higher loan amount.
One of the best advantages of an adjustable rate mortgage is that you can often receive a lower interest rate than you would be able to obtain with a fixed rate mortgage. You can’t; however, be guaranteed your interest rate won’t rise above the initial rate you receive at the outset of your loan. In fact, it is not uncommon at all for the interest rate to fluctuate to some degree over the course of your loan.
An adjustable rate mortgage will typically have an annual cap rate and a life-time cap rate. So, for example if your ARM starts out at 5.75% and has an annual 2% cap rate, this means your interest rate cannot be adjusted more than 2% during that time period. If the life of the loan cap rate is 6% your total interest rate may not be adjusted higher than 6% over the start rate. In this case, your rate could not exceed 11.7% during the life of the loan.
Of course, this can also be a good thing. With an adjustable rate mortgage the rate can go down as well as go up. So, while the interest rate you start out with may already be lower than the rate you would receive with a fixed rate loan, if rates drop even further in the future you will be in a position to take advantage of those rate drops as well.
Adjustable Rate Mortgages Summary
An adjustable rate mortgage is a fantastic option you can use to save money on your next home purchase. A professional mortgage lender can help answer all of your questions regarding adjustable rate mortgages and how they may fit in your next home purchase plans. At MortgageLenders.org we're prepared to help you find the right mortgage lender to handle your adjustable rate mortgage.