Adjustable Rate Mortgage – What You Need to Know
If you have ever thought about getting an adjustable rate mortgage, you’ve probably come to a realization that you’re in for a shock. The term “adjustable rate” refers to a loan that changes in rate depending on an index. This index reflects the cost to the lender of borrowing money on the credit markets. Your mortgage lender may offer you this type of loan at a standard variable rate, or they may choose to use a market index to set your rate.
Interest rate caps offer protection to borrowers
An interest rate cap protects borrowers of adjustable rate mortgages against unexpected increases in interest rates. It acts like a type of insurance policy, with a purchaser paying a premium to a third party to cover any difference in interest rates. The rate cap is paid to a rated financial institution, which locks in the maximum interest rate. Once the premium is paid, the borrower has no further obligations and no residual credit risk.
Lower initial interest rates
When it comes to adjustable-rate mortgages (ARMs), the initial interest rates are lower than those of a fixed-rate mortgage. However, once the fixed period has ended, these interest rates are subject to change. Most ARMs adjust on their anniversary, 45 days before the anniversary. Some adjust monthly. Despite the risk of variable interest rates, an ARM can save the borrower money. Although the monthly payments are higher, the initial savings can outweigh any subsequent increase.
Lower monthly payments
Whether you want to take advantage of the low mortgage interest rates now or wait for the adjustable rates to go up, there are a few things you can do to minimize the impact of these changes on your budget. First of all, be sure you know exactly how adjustable-rate mortgages work. You should ask your lender about the worst-case scenarios, as this will keep you from being surprised by the changes in your payments. Generally, borrowers assume that they will be in a better financial position in the future, but that rarely happens.
Flexibility to refinance
Whether you’re planning to move in the next few years or stay put for the long haul, you may want to refinance your adjustable rate mortgage. While the costs of closing may be substantial, the flexibility to adjust the payment will likely outweigh the additional costs. You may also want to lock in a fixed interest rate to avoid paying more in interest over the life of the loan. This option is available to many borrowers with adjustable rate mortgages, including PrimeLending.
Hybrid ARMs 주택담보대출
If you are considering an ARM, you may want to consider a hybrid ARM. These mortgages can increase and decrease in rate depending on market conditions, so you should know what to expect before signing on the dotted line. They can also have flexible terms, so you can take advantage of them if you’re only planning to stay in your home for a few years. Hybrid ARMs are an excellent choice for people who need a mortgage but don’t want to be saddled with a large monthly payment.
Payment-option ARMs are popular among people who plan to move out of their current home before the adjustable rate period is over. They may also be advantageous for those borrowers whose income is expected to increase in the next few years. In general, the lower monthly payments of payment-option ARMs are beneficial for people who do not plan to stay in their current home for a long time. Considering the length of the adjustable rate period of an ARM before making a decision to apply is a wise idea.