When you are in the market for a new home, one of the most complicated aspects of the purchase may be choosing a financing vehicle for your property. Mortgage loans have become quite diverse in recent years in an attempt to accommodate every financial need and housing purchase. One loan package that has become rather popular is the adjustable rate mortgage. These loans generally start out with an enticingly low interest rate that will rise and fall with market trends. But the adjustable rate mortgage isn’t the best choice for everyone. Read on for tips on choosing the right mortgage product for your needs.
Advantages
There are a number of advantages to the adjustable rate mortgage. As we have already mentioned, the introductory interest rate is usually much lower than what is offered for a traditional 30 year mortgage rate. However, that low rate can change periodically, usually based on the rise and fall of a 1-year US Treasury Bill or another similar benchmark. If it appears that rates are in a dropping mode, an adjustable rate mortgage might be the way to go.
This is also a good choice if you will be needing extra cash during the first year of the loan for home improvements or landscaping. However, going into debt during this time will cause a significant problem if your monthly payments end up rising before your balance is paid in full. Some homeowners will also opt for an adjustable rate mortgage if they are not staying in the house long, since the rates won’t have time to max out during a shorter term. You can also begin with an adjustable rate mortgage and then refinance as the rate begins to rise. However, keep in mind that refinancing will be done at the current market rate, which may be higher or lower than your original rate.
Disadvantages
The adjustable rate mortgage isn’t the right choice for everyone. It should not be used to get into a more expensive house than you can afford, since a rise in rates may make the home too expensive much quicker than you’d like. It is also important to understand the terms of the loan thoroughly, such as how often the interest rate can fluctuate and what the caps on those fluctuations might be. Many people are unpleasantly surprised by how much their monthly payments can go up with the rate fluctuations, so make sure you are prepared for any additional mortgage expense that might arise.
The adjustable rate mortgage isn’t right for everyone, but it can be a savvy financial choice for some. If an adjustable rate mortgage sounds like the right loan product for you, talk to a loan officer about the ins and outs of the loans they offer and make sure you understand the terms perfectly before you sign on the dotted line.