Mortgage Refinancing: Protecting Yourself When Using an Adjustable Rate Mortgage
Adjustable Rate Mortgages (ARM) typically come with lower interest rates than fixed interest rate loans. These loans often come with an introductory period where the initial interest rate is significantly lower than the actual interest rate. At the end of the introductory period the lender will convert your loan to the actual interest rate and depending on the type of ARM you choose your payment amount will change.
Depending on your tolerance for risk, using an interest only or payment option Adjustable Rate Mortgage could help meet your short-term financial needs. Before choosing an Adjustable Rate loan when mortgage refinancing, find out which index your interest rate is based on. Depending on the adjustment interval of your loan, the lender will adjust your interest rate to this index plus markup. Some indexes are more volatile than others; it pays to shop around and choose the most favorable financial index.
You can minimize the risks of mortgage refinancing with an Adjustable Rate Mortgage with caps. There are two types of caps that protect borrowers with Adjustable Rate Mortgages and you need to ensure your loan has both of them. Rate caps protect your interest rate by limiting the amount the interest rate can change when the lender makes an adjustment. Periodic caps limit the amount your payment amount can change when the interest rate changes. Make sure your Adjustable Rate Mortgages has both periodic and rate caps. Adjustable Rate Mortgages that do not have properly structured caps can experience negative amortization; this results in a mortgage balance that grows over time.
You can learn more about your mortgage refinancing options including common mistakes to avoid by registering for a free mortgage tutorial.
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Louie Latour specializes in showing homeowners how to avoid costly mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing - What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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