Choosing the right mortgage involves knowing how mortgage rates work. Mortgage rates are affected by several factors. One of them is the type of mortgage consumers take.
There are two types of mortgages available in the market. The first one is a fixed-rate mortgage, where the rates are set for the duration of the loan term. The second one is the adjustable-rate mortgage.
In an adjustable-rate mortgage, the interest rate periodically changes. Interest rates in adjustable-rate mortgages may either increase or decrease, depending on how prime rates are changing. This ability of adjustable-rate mortgages may lead customers to get cheap interest rates, allowing them to save more on their monthly repayments. On the other hand, adjustable-rate mortgages may also work the other way around. Interest rates in adjustable-rate mortgages may increase when prime rates of lending companies also increase.
Because of the complexities involved, adjustable-rate mortgages are usually restricted to savvy investor types who wish to pay less so that they could channel their extra funds on other investments. If the low-interest rates remain steady, adjustable-rate mortgages could be inexpensive. This is also why some homebuyers who are more enterprising than others take to adjustable-rate mortgages.
How Adjustable Rate Mortgages work
Adjustable-rate mortgages have very low-interest rates at the start of a specified loan period. The interest rates of adjustable-rate mortgages are even lower when compared to 15- and 30-year mortgages. This is the primary reason why homebuyers prefer adjustable-rate mortgages.
Adjustable-rate mortgages may involve varying monthly payments over a period of time. Because interest rates of adjustable-rate mortgages may either rise or fall, it is therefore advisable that only those who are financially secure should get an adjustable-rate mortgage.
Cheap rates of adjustable-rate mortgages may only last for a specified time period, after which, the monthly payments may increase or decrease. Interest rates of adjustable-rate mortgages are changed on a regular basis based on a pre-selected index. There are several kinds of indices used for adjustable-rate mortgages. The most common is the yield on the one-year Treasury bill.
Adjustable-rate mortgages may have new interest rates which are calculated by adding the index to a set margin determined by the lender. Inexpensive rates are available in adjustable-rate mortgage programs for one, three, five, seven, and ten years. The most common adjustable-rate mortgage is the 1-year program. This type of adjustable-rate mortgages has a low-interest rate for a fixed period of one year but after which, it is adjusted to suit the index and set margin.
The interest rates of adjustable-rate mortgages are not adjusted every month. On the contrary, interest rates of adjustable-rate mortgages are changed regularly every year or every three years. A six-month adjustable-rate mortgage is difficult to handle and should only be accepted if the adjustments are stated clearly in the loan agreement.
Adjustable-rate mortgages may be converted into fixed rates if it is essential. Adjustable-rate mortgages are also assumable mortgages. This means that an adjustable-rate mortgage may be transferred to a new buyer who would assume the same terms of the said mortgage. The new buyer would have to qualify for the adjustable-rate mortgage before he can assume it.
