If you check for mortgage options, you are likely to find two major choices – adjustable-rate mortgage and fixed-rate mortgage. In case of adjustable-rate mortgage, the interest rate is fixed for a specific period, after which it floats. The payment for the fixed period remains uniform, after which the payment depends on the index and margin that are applicable for adjustable-rate mortgages. You should know that there is a cap to the limit of rate change, and the point at which the mortgage has a variable interest rate is called the reset date. Here are some more aspects worth knowing about adjustable rate mortgage.
Decoding the interest rate
For most people, understanding how the interest rate works for adjustable-rate mortgages is hard. Before you apply, it is critical to decode that aspect. The basic idea is simple – the interest rate remains fixed for a specific period (say 7 years), following which it can change every year. The rate cap will ensure that the fluctuations are not too high. There are many standard rate indexes that determine the interest rate for the year.
Should you consider adjustable-rate mortgages?
Given that adjustable-rate mortgages have a fixed initial rate, you will not have to pay huge in form of monthly payments. Secondly, hybrid adjustable-rate mortgages are great if you think that you will not stay in the house for long, or there will be changes that may impact your life a few years down the line. Since there are caps for payment and interest rate, you don’t have to bother about paying extreme high at some point. Note that we are talking about hybrid adjustable-rate mortgages, and not the traditional adjustable-rate mortgages. In case of latter, there are no caps involved.
Things to note
If you plan to stay in your property for decades to come, a hybrid adjustable-rate mortgage might not be a great idea. Also, with adjustable-rate mortgages, you have to pay a variable interest rate, which means that your budget can go awry at some point. It is always better to compare all your mortgage options adequately before deciding on an option. It is also necessary to have all the papers in place and ensure that the application is completely as required.
The loan manager may offer assistance and help on how to decide on hybrid and traditional adjustable-rate mortgages, so take their advice and do your own homework, as well.