Positives And Negatives of Adjustable Rate Mortgages
August 8, 2011 Mortgage Finance
It seems that lately adjustable rate mortgages have been given a bad name, but they wouldn’t have been around so long if they didn’t have a good purpose. A lot of borrowers simply don’t understand them and shy away from them. When you compare them to a fixed rate mortgage, then they really are a bit more complicated. When borrowers obtain a fixed rate mortgage, they know exactly what their payments will be and their rates right from the start. But with adjustable rate mortgages they can experience some ups and downs depending on several factors. Here are some things to consider about adjustable rate mortgages.
Generally a flexible rate mortgage will offer low interest rates at the beginning to enable lenders to qualify a lot of applicants. It can be hard for many consumers to see what they are getting with some mortgages. They see the low monthly payments and not the dangers. Let’s say that the rates shoot up drastically. If they do these people may find it hard to manage these rate jumps.
While interest rates are coming back down, those with a flexible mortgage can take advantage of the lower rates and not have to refinance. If they have a fixed rate mortgage they miss out on the rate changes and have to refinance, which can be costly. However if the rates increase the monthly payments can rise sharply with little to no notice. Even an adjustable rate mortgage with an interest cap has an initial increase that rises to meet the cap in short time.
When you aren’t wanting to keep your house for that long, the flexible rates can show themselves to be superior to fixed rates, and a good choice because of their shorter periods and manageable prepayment penalties. The fixed rates are easier for borrowers to budget for.
Some mortgages may come with a starting fixed rate and then turn into flexible mortgages. This gives you the benefit of working both types. There are lots of hybrid products out now that you can enjoy to help meet the various needs borrowers have today.
If you are a borrower and have a good strategy ready for your mortgage decisions, you have all sorts of options available to meet you where you need it. I hope this helps you better understand the positives and negatives of adjustable rate mortgages and opens up your mind to think a bit differently in terms of mortgages.