How Adjustable Rate Mortgages Work

When applying for a mortgage there are several things that you must consider so that you get the best one for your current situation. You will need a mortgage that gives you an affordable payment with an interest rate that is not so high that you are five years in before touching the principle. The two most common types of mortgages are the adjustable rate and the fixed rate. With the fixed rate mortgage the interest charged will remain the same for the entire length of the mortgage. The adjustable rate mortgage will have changes over the course of the loan’s period.

In the beginning of the mortgage you will have the introductory or initial rate period. This can last a short time (only a few months, for example) or a longer period of time, such as five to ten years. At the end of this period, the initial rate will change either up or down according to several factors including market trends and the interest rate index. Smart home buyer’s who are nearing the end of their adjustable rate mortgage’s initial rate will start watching these trends to get an idea of whether their mortgage will increase dramatically or not.

People who are intending to be in the home for a very long time, the “final” home as it might be called, may prefer to take on the relative safety of the fixed rate mortgage because there are no surprises or changes to deal with at the end of the initial rate period. However, some people will buy a home with no intention of being there longer than five to ten years and may prefer the lower rate of the adjustable rate mortgage if that is the case.

Then they can negotiate a deal that will lock in that rate for five years or longer which will give them the time to get out before the rate is set to change. However, this ploy does have some risks including the inability to sell the home before the rate period ends. In an area with a slow or stagnant real estate market this is a very real risk and should be considered before taking on this type of mortgage. The initial cost savings will not matter if you are stuck in a home that you had no intention of keeping or worse, end up having to pay two mortgages because you have moved before selling your old home.

Another post from Gina Wilson – Credit & Loans Specialist Blogger.

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