If you are a homeowner that will be staying in your home for at least seven years, traditional fixed interest rate mortgages are safer choice. If you’re planning on moving before then, an adjustable rate mortgage may be the way to go.
Adjustable Rate Mortgages loans are as the name implies, a loan with a variable interest rate. These loans have become an extremely popular option for homebuyers in the United States. Adjustable rate mortgage loans allow homeowners to have smaller monthly payments while qualifying for financing they may not be eligible for with a traditional fixed rate mortgage loan.
Adjustable rate mortgage interest rates closely follow short term interest rates in the bond market. Traditional fixed rate mortgage interest rates are associated with long term interest rates. Homeowners typically pay more for long term interest rates because the lenders assume more risk with longer loan durations. With short term adjustable rate loans the homeowners shoulder more risk with their monthly payments. As interest rates rise, so do monthly payment amounts. Also, when the introductory period of the adjustable rate mortgages comes to an end, the monthly payment can increase sharply depending on the mortgage lender’s terms.
According to one national lender, an adjustable rate mortgage can often be as much as 3 points lower than a traditional fixed interest rate mortgage loan. In spite of this, the risks associated with adjustable rate mortgages may not be for everyone.
If you’re planning on staying in your home or are uneasy with the recent stair-stepper interest rate hikes at the hand of the Federal Reserve, stick with a traditional 30 year fixed interest rate mortgage. You’ll sleep better at night.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
