Adjustable Mortgage Rates for Beginners:

by Kuntal Mehta - Date: 2007-02-22 - Word Count: 790 Share This!

Adjustable rate mortgage are popular for the reason that they allow you to afford bigger mortgages. For instance if you know that your income would be rising in the future, and you have accordingly planned to sell your house in say, another five years, adjustable rate mortgages may be a good financial option, for you. This is where adjustable rate mortgages have gained popularity of fixed rate mortgages, where the amount to be repaid as interest remains ‘fixed', as the name suggests, irrespective of market conditions. In case of a fixed rate mortgage, even in the case of fluctuation in interest rates, you need to pay only the amount, agreed upon in the beginning. It is not so in the case of a adjustable rate mortgage, where your interest rate will be adjusted, based on the fluctuations in the interest rates. One stands to gain if the interest rate were to drop.
If the interest rates were to fall, you need not go in for refinance, as your payments will be automatically be recalculated, based on the lower rates of interest. Similarly if the interest rates were to go up, your repayments can also go up significantly, during the life of the loan. This can happen even with caps in place. This is where one needs to be careful while going in for adjustable rate mortgages.
The rate is usually decided by something known as ‘money market index'. Depending on the fluctuation of the index, you can end up paying more or less. The rate for an adjustable rate mortgage usually begins lower than fixed rate mortgages, available at the same time. The rates are dependent upon the prevalent economic conditions. You can find out more about the rate adjustments, in the beginning itself, by going through the terms of the loan.
Mortgage loans have enabled higher purchasing power. People can now for instance, realize their dream of owning houses, right in the beginnings of their career. It would not have been possible without mortgage loans. When it comes to mortgages adjustable mortgage rates are perhaps the more preferred choice among people. With almost every lender proclaiming to offer low adjustable mortgage rates today, you are bound to be confused, while making a decision.
The thing with low adjustable mortgage rates is that even though they are ‘low', you still have to pay them. Although they may be low to begin with, with the fluctuations in the market or economic conditions, they could suddenly go up, with you end up feeling sorry, for having falling to the bait. One has often heard of lenders offering rates that are even lower than the sum of the index. Such rates are known as discounted rates. They come with a catch though, in that they are often combined with a large initial loan fees and with much higher interest rates, after the discount expires. This is one reason why it makes sense to make a prudent decision while going in for low adjustable rate mortgages today.
It is therefore important that you decide on the correct low initial rate, based on your ability to repay the same. You should be careful enough to consider, whether you will be able to afford payments, after the discount expires and the rate is adjusted. Remember for one thing, with low adjustable mortgages, your low initial payment, will not probably remain low, for long. You can be in for what is known as a ‘payment shock', when the mortgage payment rises very sharply at the first adjustment, itself.
Adjustable mortgage rates today are perhaps one reason for the booming real estate business. People are literally bombarded with advertisements proclaiming the lowest adjustable mortgage rates, through literally every kind of media available.
Adjustable rate mortgages mostly come with a ‘cap', which decides the maximum amount a rate can change at one given point of time. The maximum amount can vary from the original rate over the life of the loan. This is where adjustable rate mortgages are considered a risky proposition. Market conditions are never so easily predictable, more so, over a long period of time. With repayment terms increasingly getting longer, sometimes, even as long as 30 years, as in the case of housing loans, one can never be sure , what will happen down the line. Therefore it is necessary; you take into consideration several factors before going in for adjustable rate mortgages.
Several lenders also offer something known as ‘conversion option'. This option allows you to convert your adjustable rate mortgage to a fixed rate mortgage, during a future point of time. Check whether your lender offers this option because it is a good thing to go in for, in case interest rates begin to rise.

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