Are you considering mortgage refinancing with an Adjustable Rate Mortgage? If so, you will undoubtedly run across some very competitive mortgage rates. Are these low rates really a good deal? They could be a good deal, but maybe not. Here are several things to lookout for when mortgage refinancing with an Adjustable Rate Mortgage.
Teaser Rates Bait & Hook Gullible and Desperate Homeowners
Mortgage companies use teaser rates as a marketing trick to lure homeowners that don’t fully understand how Adjustable Rate Mortgage loans work. You know it’s a teaser rate when you see an advertisement for a 2.95% mortgage rate. Read the fine print and you’ll discover the mortgages comes with many strings attached.
Prepayment Penalties – These loans often include heavy penalties for early repayment. Pay off your mortgage early and you could pay as much as 3% penalty.
Negative Amortization – Adjustable Rate Mortgages are prone to experience “negative amortization” when the underlying index for your interest rate goes up during the teaser period. Any unpaid amounts from this increase are tacked on to your outstanding loan balance.
No Lifetime Caps – Over the life of your loan your mortgage interest rate could theoretically increase as much as 13%.
Mortgage lenders use teaser rates to prey on homeowners that lack understanding. If a mortgage company offers you mortgage rates or terms that sound too good to be true, be on the lookout for the strings attached. The problem with teaser rates on Adjustable Rate Mortgages is the homeowners frequently get hit with payment shock when their teaser rate runs out. The teaser rate is not the same as your contract interest rate which your payments are based on when the teaser expires.
It is possible to leverage a teaser rate to your advantage if you fully understand how the loan works. If you can negotiate for a mortgage with no prepayment penalty, you could use an Adjustable Rate Mortgage for a short term financial need and save yourself thousands of dollars in mortgage interest. You can learn more about your mortgage refinancing options with Adjustable Rate Mortgages by registering for our free six part tutorial.
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.
