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What You Need To Know About Adjustable Rate Mortgages
f you’ve been trying to Traditional fixed rate mortgages
buy a house you may have allow you the security and
noticed there are a lot of stability of knowing that your
numbers to consider: the price of mortgage interest rate will not
the house, your savings, the fluctuate with market conditions.
amounts of the down payment and
monthly payments you can afford,
as well as a host of other This means that if interest rates
figures and fees. Trying to find spike, you will be protected.
a mortgage that meets your needs
is another numbers game, but this Conversely, if interest rates
one can work in your favor. drop, you will not be able to
take advantage of the potential
You may not realize it, but there savings without transferring your
is great variety available to mortgage to another institution
home buyers shopping around for a or making other possibly
suitable mortgage. complicated arrangements.
Different banks, brokers and Adjustable rate mortgages (also
other lending institutions all known as variable rate
offer their own mix of short-term mortgages), are different than
and long-term mortgages, as well fixed mortgages in that the
as both fixed rate and adjustable interest rate you pay on the
rate mortgages. outstanding principal of your
loan fluctuates according to
So how do you know which changes in the posted index rate.
combination is the best for you?
That depends on your
circumstances. There is a certain amount of risk
involved with an adjustable rate
mortgage in that you may end up outstanding balance early into
paying more money in the long run your loan period.
if interest rates rise and stay
high. You also have the potential By doing so, you reduce the bulk
to take advantage of savings if of your loan while paying the
interest rates fall. initially lower interest rate. An
adjustable rate mortgage may also
An additional bonus to adjustable be the best choice for you if you
rate mortgage is the lower anticipate greater future income
initial interest rate. You may be or if you intend to pay off the
risking higher or unstable entire mortgage loan quickly –
payments, but you are rewarded again due to the lower initial
with a lower interest rate when interest rate.
your loan is at its fullest
point. Even if rates were to increase
early into your mortgage period,
Unless interest rates rise the fluctuation would unlikely be
dramatically, this advantage is so great that it negated the
likely to save you more money difference in interest rates
than if you had chosen a fixed between a fixed rate plan and a
rate mortgage. variable rate plan.
There are advantages and You can reduce the financial
disadvantage to securing an risks associated with an
adjustable rate mortgage loan. adjustable rate mortgage by
asking your lender about interest
However, you may find an rate ceilings or caps that
adjustable rate mortgage protect mortgage holders from
worthwhile if you intend to pay sharp increases in the amount of
off a large portion of your money they must pay each month
(or whatever their payment period This happens when the balance of
is: monthly, weekly, bi-weekly, your mortgage is actually growing
etc.). rather than shrinking because
your regular payments are not
The overall ‘ceiling’ restriction large enough to pay all the
is legislated in almost all interest plus a portion of your
cases, and it limits the total outstanding principal.
possible interest rate increases
over the period you hold the A final option to consider is
loan. Periodic caps help control arranging to have the ability to
interest rate hikes between convert your adjustable rate
adjustment periods. mortgage into a fixed rate
mortgage at a designated time.
Your lender may also be willing
to consider payment caps, which You may pay a fee for converting
stabilize your monthly or your mortgage, but if you find
periodic payments so any interest yourself in a situation where
rate fluctuations are worked into interest rates are rising
your payment by way of adjusting rapidly, it may be worthwhile to
the ratio of principal to stabilize your payments and
interest each payment covers. balance by switching to a fixed
rate plan.
This is a great option if you
have limited income flexibility, Speak to your financial advisor
but could result in a negative to find a mortgage plan that fits
amortization period over the long your budget and your needs.
haul.
About the Author:
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