Adjustable rate mortgages can be a great choice for first time home buyers. As opposed to a fixed rate mortgage, which the interest rate remains the same for the entire life of the loan, an adjustable rate mortgage changes according to an index rate, usually chosen by the mortgage lender.
This index rate determines the current market rate for mortgages. So as you make payments for the life of your loan, the monthly payment may be lower, or higher than the original quoted rate, depending on the index rate chosen to dictate the current market rate.
The mortgage rate may change form year to year, or perhaps every two years, depending on the loan that you have received. If one year, the current market rate drops percentage points, then your mortgage rate could be considerably lower. However, if the interest rates spike, then you could have a considerably higher interest rate.
Because there is a higher risk associated with adjustable rate mortgages, the introductory rate is usually lower than that of a fixed rate mortgage. However, as already discussed, that can change after the first year, or maybe second year. The home owner should recognize this possibility as being either positive or negative, and be prepared for the change no matter if it is an increase or decrease in monthly payment.
There is a sort of protection device, however, for those who option for an adjustable rate mortgage over a fixed rate mortgage. Caps can be discussed as terms for a mortgage. Caps are literally limits put on the interest rate, so it does not go above a certain amount.
At the possibility of a home owner's mortgage rate to go above 6 or 7 percent, caps can really protect the home owner's interest. Caps can place the limit, usually around 5 or 6 percent, so it does not go up to 8 or 9 percent, which would be disastrous, and definitely frustrating to a home owner's bank account.
If you are negotiating terms for a home mortgage, be sure to always have caps on your adjustable rate mortgage. If you your mortgage broker or lender is not open to these caps, then please go somewhere else where you can get caps. The mortgage lending business is very competitive and there will be a broker or lender who will be willing to negotiate these terms. It is very common to have caps on an adjustable rate mortgage, so be aware of it and mention it if the lender doesn't.
If you have an adjustable rate mortgage already, and have either experienced a large increase in monthly payments, or expect a large increase, then perhaps you should either renegotiating your current terms or refinance. Don't let a mortgage lender take advantage of you by either denying you caps, or simply avoid telling you about them.
If you are planning on purchasing a home, be sure to investigate all options for your mortgage rates. Whether you choose a fixed rate mortgage, adjustable rate mortgage, or bi-monthly mortgage, be sure to understand all terms of the mortgage and how they can effect not only your monthly payments, but also the total amount that will be paid in interest.
If you are unclear on an issue, ask your mortgage broker or lender for assistance. You can even consider a third party's opinion such as a trusted financial advisor or knowledgeable friend. There are many resources for you to learn from, so be sure to always educate yourself and never make decisions without clarity.
John R Blakefield is a mortgage and real estate specialist. For more information, articles, news, tools and valuable resources on home mortgages or investment loans, refinancing, debt solutions, visit this site: http://www.scourtheweb.com/mortgage/.
