Home | Ask Your Question | Mortgage Glossary
Find me a lender for:  
Adjustable Rate Mortgages Talking About Interest Rate Caps By Sergio Haros

Many people have jumped on adjustable rate mortgages to take advantage of the historically low interest rates we have seen over the last few years. Rates are now rising, which means you need to understand caps.

Adjustable Rate Mortgages Talking About Interest Rate Caps

An adjustable rate mortgage is just what it sounds like. The interest rate can be adjusted to match certain interest rate standards. The advantage of such a loan is it can seriously lower monthly mortgage payments if interest rates are low. Over the last few years, of course, rates have been incredibly low. Rates are now rising and you need to understand what that means for your adjustable rate mortgage.

Since the interest rate on your loan is adjustable, you should be getting a little nervous about rising interest rates. That being said, most loans have graduated step increases and caps that keep things from getting nightmarish too quickly. Here is a closer look.

A good adjustable rate mortgage protects you from massive rate increases through something known as rate caps. There are two types of rate caps. Each has benefits and negatives.

A lifetime rate cap is just what it says. This cap sets the maximum interest rate the lender can charge you for the loan. You must always demand a lifetime cap on any mortgage you take out. Assume you take out an adjustable rate mortgage with an interest rate of four percent. As part of the agreement, the loan has a lifetime cap of eight percent. If interest rates shoot up to 10 percent, your loan will cap out at nine percent. While this is a high interest rate, it is a lot better than paying 10 percent.

Periodic rate caps also protect you, but in a different way. A periodic rate cap defined the maximum percentage your interest rate can increase over a period of time. The shorter the time period, the better the cap. If your loan document allows the lender to adjust the rate every six months, the cap may be as low as one percent. This means the lender can only increase the interest rate by a maximum of one percent, regardless of what the market is charging for new loans.

Adjustable rate mortgages are great when interest rates are low. When rates start creeping up, however, you need to take a close look at your caps.

Sergio Haros is with Great Western Mortgage - San Diego home loans provided by San Diego Mortgage Brokers. Great Western Mortgage is a San Diego mortgage company providing San Diego mortgages, San Diego home equity loan and San Diego mortgage solutions.

See Also:

Mortgage Loan Basics: Interest Only Loans, Pay Option ARM
Mortgage Loan BasicsTo understand loans and mortgages we need to understand loan limits first. If your loan amount exceeds the amount below, you will qualify for a Jumbo Loan, which carries higher interest rate.One-Family (single family homes) $417,000 Two-Family(duplex) $533,850 Three-Family ... more...

Selecting the Right Mortgage for You
A mortgage is a loan you take out to buy a home. This loan covers the "principal" (purchase price of the house minus your down payment) plus the "interest," which is the fee a lender charges you to borrow the money.There are various types of mortgages, including Fixed-rate, Adjustable-rate, Balloon ... more...

Do Your Homework - Find the Mortgage That Fits Your Lifestyle and Your Budget
You've been looking at houses for months, and finally youve found it--the house that's just right. So now, all you have to do is to purchase your new home, move in, and get settled, right? Not quite. Theres one more big step to go-getting a mortgage loan. Youre going to want to decide on the type ... more...

4 Ways To A Low Mortgage Interest Rate
It is natural to want the lowest possible interest rate on your mortgage loan. A lower interest rate results in a lower monthly payment or allows you to afford more house for the same monthly payment. Here are four quick ways to get a lower interest rate on your next mortgage loan.1. Shorten The ... more...

More on interest rate...

Search More Info On:

  • Interest Rate
  • Interest
  • Mortgage Interest Rate
  • Mortgage Rate
  • Interest Mortgage
  • Mortgage

    Shop For Your Mortgage Now!
    Shop For Your Mortgage Now!

    You'll be re-directed to Top-Lenders.com

    Want to Know Your Rate?
    Get Customized Mortgage Quote Instantly

    ExplainingMortgages © 2005 - 2009