The concept of an Adjustable Rate Mortgage is confusing for many homeowners. Adjustable Rate Mortgages are typically popular with homeowners looking for lower interest rates and monthly payment amounts.
Adjustable Rate Mortgages offer lower interest rates and payments even when interest rates are rising by offering homeowners an introductory interest rate for a specified period of time. When you see a mortgage offer with an unusually low interest rate, 2.5% for example, this is an introductory rate which your payments will be based on for specified period of time.
How Adjustable Rate Mortgages Work
The introductory period offers a fixed interest rate for a period of time specified in your loan contract. This period of time is typically 3, 5, or 7 years; however, this duration varies from one lender to the next. During this period of time the interest rate and monthly payment amount will not change.
When the Mortgage Adjusts
At the end of your introductory period the mortgage lender will adjust the interest rate and your monthly payment amount. The lender will use whatever financial index your mortgage is tied plus their markup. Many homeowners refinance their mortgages prior to the expiration of the introductory period. If you are concerned with rising interest rates, refinancing your mortgage to a fixed rate loan will save you peace of mind.
Interest Rate and Payment Caps
Caps protect homeowners from excessive changes in their monthly payments or interest rates. Make sure your Adjustable Rate Mortgage has both interest rate and payment caps. Mortgages without rate caps are prone to negative amortization when the payments do not rise enough to cover the increase in the interest rates. You can learn more about your mortgage options by registering for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”