Adjustable Rate Mortgage Basics |
By Louie Latour |
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Lenders designate Adjustable Rate Mortgages with a series of
numbers. You will see loans designated 1:1, 3:2 or even 5:1. These
numbers tell you the number of years your mortgage will have a fixed
rate and how frequently after that your interest rate will be
changed after that. For example a 1:1 mortgage carries a fixed
interest rate for the first year. After the first year your interest
rate will be recalculated every year.
Before selecting a
mortgage with an adjustable interest rate to finance your home you
need to understand the risks associated with these loans. If you
fail to consider the risks you could find yourself with an
unmanageable mortgage payment once your loan begins adjusting.
In most market conditions adjustable rate mortgages loans offer
lower interest rates than traditional fixed interest rate loans.
There is a condition in the market place called an inversion where
short term interest rates go up faster than long term interest
rates. When this happens Adjustable Rate Mortgages can have higher
rates than long term fixed interest rate mortgages. Market
inversions are rare; unfortunately, the year 2006 started with this
interest rate inversion
The danger to consider with an
Adjustable Rate Mortgages is the risks associated with these loans.
Your interest rate could go up during unfavorable market conditions.
When this happens your monthly payments will go up as well. When
your payments go up you could find yourself unable to manage the
mortgage and you could potentially lose your home to foreclosure.
If you are uncomfortable with this risk you should steer clear of
Adjustable Rate Mortgages and stick with a traditional fixed rate
mortgage loan. |
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