Getting an adjustable rate mortgage may not always be the type of loan you need. But then again, it just may be. This type of loan is secured against the value of a home, with an interest rate and a monthly payment that varies. This adjustable rate transfers part of the rate of interest to the homebuyer to the creditor. This mortgage gets used most often in a situation where the fixed rate loans have become difficult to get. The borrower may be at an advantage should the interest rates fall, but a definite disadvantage should they rise.
The adjustable rate mortgage suits homeowners who plan to live in their homes for around three years. Most usually, the rate of interest will be low during the first three years, up to around seven years, and then begin to go up and down from there. But it gives the homebuyer the chance to pay down the principle early. They do not need to worry about any penalties. Whenever you make payments on principle, it helps to lower your total loan amount, and thus reduces the time it would normally take to pay the loan off. So a lot of homebuyers want to pay their loans off entirely while the interest rate is low, and we call this ‘refinancing’.
One of the biggest disadvantages with these adjustable rate mortgages would be that they are sold to inexperienced people who don’t know how to deal with them. They may not pay it back in the time period of three and seven years, and so will be subject to the fluctuations of the interest rates, which can go up at any given time. The United States tries these loans as being ‘predatory’ loans. You have some protective options against these fast rising interest rates. There can be a rate cap for maximum allowed interest that will keep the rates from exceeding a certain amount every year. Or else a specific rate can get locked in over a certain amount of time. This can give the homebuyer some extra time for increasing their income to pay more on their principle.
The main good advantage for these loans is the way they lower the costs of borrowing money, particularly through the first years of the loan. Homeowners can save substantially on their monthly payments, and it’s perfect for people who plan to move into another home before the seven-year period is up. At the same time, the risks involved should be understood as well. Should the home-buyer run into any unforeseen problems, and can’t make timely payments, or has any kind of emergency, if the rates go up, they may not be able to make their payments and lose the home.
One of the terms you’ll hear used a lot by lenders is ‘caps’. A cap is defined as being a clause, which sets the highest change possible in regard to the rate of interest on the loan. Home-buyers can get a cap set up for their mortgage, but they need to request if from a lender, because it could not be present on the current rate sheets being presented.
