Adjustable rate mortgage loans are simply mortgages with an interest rate that changes over time. If you are considering an adjustable rate mortgage, your lender will often present you with an offer in the form of two numbers. You may see these numbers similar to these: 1:1, 3:2, or 5:1.
The first digit is the number of years in the mortgage’s introductory period. During the introductory period the mortgage will have a fixed interest rate. The second digit is the timeframe the lender will review your loan. Take a 3:2 adjustable rate mortgage for instance; for the first three years of the loan the initial interest rate is guaranteed. After that period the lender will review and adjust the interest rate every two years.
Before deciding on an adjustable rate mortgage for your home, you need to understand the risk associated with this time of loan and weigh that risk against the advantages.
The main advantage you could receive from choosing this type of mortgage is that adjustable rate mortgages typically come with lower interest rates than a traditional fixed rate mortgage. This lower interest rate results in a lower monthly mortgage payment. Adjustable rate mortgages make sense if you do not plan on staying in the home very long or plan on refinancing before the rate goes up.
There are risks associated with adjustable rate mortgages. The main risk is that interest rates will go up and take your monthly payment with it. This could put a serious damper on your monthly cash flow. If you’re unable to keep up on your monthly payment you could even lose your home.