Adjustable rate mortgages are used by many home buyers because of the lower loan payments in the first years of making payments. The interest rate can be much lower than the fixed rate loans, but this is not always true. Buyers should evaluate the terms of these mortgages and how they compare to other alternatives. This blog offers an introduction to adjustable rate mortgages in Waltham MA.
An Introduction To Adjustable Rate Mortgages In Waltham MA
Interest Rate Changes and Time Periods
Adjustable rate mortgages start at a lower interest rate for a designated period of time and can change at certain times thereafter. For example, a 5-1 ARM may stay at the same rate for the beginning five years and fluctuate every year after. The fixed rate period and the periods at which it will change are different for every loan. It is also common that a short fixed term may offer a lower initial rate than a long one.
Indexes and Margins
Rates on adjustable rate mortgages are typically measured by an independent index and are detailed in the loan terms. Most rely on the national mortgage index, which reflects borrowing costs throughout the country. The interest rate can either rise or fall depending on that index and a set margin on top of it (as set by the loan terms). Indexes constantly fluctuate, so future rates remain unknown until the specific adjustment time approaches.
Most mortgages include a rate cap. Rate caps limit the amount by which the rate on a mortgage can rise at a given time. There may be a rate cap for every adjustment period and for the life of the the loan. For example, a 5-1 ARM with a 2 percent rate cap will have the same rate for the beginning 5 years and can only increase by two percent every subsequent year. If there is a 6 percent lifetime cap, then it may not increase any higher than six percent above the original rate. Rate caps protect borrowers from extreme changes in mortgage payments each year and are essential to consider.
Pros and Cons of Adjustable Rate Mortgages
Adjustable rate mortgages allow lower payments in the first few years and may make home buying affordable to more individuals (or enable them to select a higher-priced property). When rates are high, the gap between fixed and adjustable rate mortgages can be significant, making them even more appealing. However, it also has risks because of the possible increase over time. Buyers expecting to own a home for extended time frames could be better off obtaining a fixed rate. This blog contains an introduction to adjustable rate mortgages in Waltham MA and is intended only as a reference. Consult a loan officer for details on individual loan programs you should consider and the differences between them.