Adjustable Rate Mortgages

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June 21, 2017
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June 21, 2017
things to consider before signing your home mortgage loan

When you’re thinking about purchasing a new home and have to come up with a decision on what you want your mortgage to be like, it is good to keep in mind the many options that are presented to you. Most of time when you think of a mortgage, you think of an amount that is a set payment each month until you pay it off a couple decades later.

That is what a Fixed-Rate Mortgage is. However, that is not your only option when you are considering applying for a mortgage home loan.

What Is An Adjustable Rate Mortgage?

adjustable rate mortgageWell, to put it simply, an Adjustable Rate Mortgage is when the price of your mortgage fluctuates over time, according to the changes in a mortgage rate index. This may result in small or large changes, causing your mortgage rate to increase after an initial period of time, where it is a fixed rate.

If there are not many changes in the index, your mortgage will only become slightly more expensive when the rate adjusts. If there are a lot of changes, your mortgage rate may see a very significant increase when you exit your initial period.

The initial period of the loan refers to a time period in which you have a fixed rate that you pay, which isn’t affected by the mortgage rate index. This period can last anywhere from a month or from up to two or even ten years. After this initial period, your rate will adjust for your next payment and your rate will increase subtly or drastically depending on the rate.

What Are The Benefits Of An Adjustable Rate Mortgage?

benefits of adjustable rate mortgage over the fixed mortgageFor many people, affording a mortgage or qualifying with bad credit, can be a very tricky situation. Some lenders don’t look twice if you have bad credit or can’t come up with a lofty down payment. That can be troubling for people who are looking to purchase a house to jump start a new phase in their lives.

But, most banks are willing to make a compromise to help people that are having trouble affording the start-up costs or having good enough credit to qualify for a loan. That is why Adjustable Rate Mortgages can be a good way to start out with.

Most of the time, when you get an Adjustable Rate Mortgage, the financial institutions are willing to work with bad credit and a lower initial start-up cost. This can be insanely helpful for those who are just starting out in life in terms of homeownership, and can especially help lower income households in affording a place to call home.

Another benefit to going with an Adjustable Rate Mortgage is if you don’t plan to stay in the house the entire time of the initial rate period, you could easily save quite a bit of money in start-up costs and then by moving out and selling the home before the rate adjusts, you could easily walk away with a better deal than if you had chosen a Fixed Rate Mortgage.

However, it can be quite risky if you are not 100% certain you will move out before the time period is up. In most cases, if you can afford it, it is better to go for a Fixed Rate Mortgage if you are unsure of whether or not you can move out before the time period comes to a conclusion.

For people who are only staying in one place for a few years, however, this situation would be more than ideal.

What Are The Cons Of An Adjustable Rate Mortgage?

potential drawbacks of adjustable mortgage loanWhile an Adjustable Rate Mortgage can be beneficial in many ways, there are also a lot of things to think about when you are making your decision. While it may seem tempting to go for the low initial rate, especially if you have a troubled credit history, it’s good to keep in mind that specials like these are usually not all they’re cracked up to be in the long run.

When making an important financial decision such as which loan to apply for, it is crucial to be aware of any drawbacks each plan might have in the future.

 

One major con is after the initial rate, your rate will rise based on the mortgage rate index. That could mean only a slight change if the index isn’t that different, or it could mean an exponential change if the index has changed drastically.

So if you don’t expect your financial state to change by the time the initial rate is up, it might mean a perilous outcome for your family. that could end in foreclosure or bankruptcy, if you can’t afford to pay the new rate.

For those who are hoping to only stay in the house during the initial rate period and save some money, it can also be dangerous with the off chance you can’t move out in time or decide to stay. So if you’re indecisive on whether or not you will stay in the house beyond the initial rate period, it is safer to go with a Fixed-Rate Mortgage, if you can afford it financially.

things to consider before signing your home mortgage loanAll in all, for someone who is planning to be in better financial position years down the line after buying a house or for someone who cannot initially afford or have strong enough credit for a Fixed Rate Mortgage, an Adjustable Rate Mortgage could be the answer to your prayers.

However, with any big financial decision, it is important to weigh the pros and cons before making any such commitment, and as always, the experts at Peak Home Loans are here to assist and guide you through every step of the mortgage loan application process and are also here to answer any questions you might have.

Our trained professionals are standing by, ready to answer your questions and make the process of looking for a new house easy and understandable for anyone, regardless of your credit or the state of your current financial situation.