Adjustable rate mortgages are attractive to many home buyers because of the lower loan payments in the first years of the mortgage. The rate can be below fixed rate mortgages, but this is not always true. Home buyers should examine how these loans work and how they differ from other alternatives. This article offers an introduction to adjustable rate mortgages in MA.
An Introduction To Adjustable Rate Mortgages In MA
Interest Rate Changes and Time Periods
Adjustable rate mortgages have a lower interest rate for a certain period of time and may adjust at certain intervals thereafter. For example, a 5-1 ARM may remain at the same rate for the first five years and fluctuate every year after. The fixed rate period and the periods at which it will fluctuate are different for each mortgage. It is also possible that a shorter fixed term will have a lower starting rate than a longer one.
Adjustment Basis
Interest rates on adjustable rate mortgages are generally measured by a publicly referenced index and are outlined in the loan terms. Many refer to a national mortgage index, which is based on borrowing patterns in the country. The interest rate may either increase or decrease depending on that index and a particular margin above it (as referenced in the financing terms). Indexes constantly change, so future rates remain unknown until the specific adjustment date approaches.
Rate Increases
Most loans mention a rate cap. Rate caps restrict how much the interest rate on a mortgage can increase at a given time. There may be a rate cap for every adjustment interval and for the duration of the mortgage. For example, a 5-1 ARM with a two percent rate cap will have a fixed rate for the beginning 5 years and may only rise by 2 percent every year thereafter. If there is a six percent lifetime cap, then it cannot increase any more than six percent above the starting rate. Rate caps protect home owners from extreme increases in mortgage payments from year to year and are essential to understand.
Pros and Cons of Adjustable Rate Mortgages
Adjustable rate mortgages include lower payments initially and can make home ownership affordable to more individuals (or allow them to purchase a higher-priced home). When rates are high, the difference between fixed and adjustable rate mortgages can be significant, making them even more appealing. However, it is also high risk because of the possible increase over time. Buyers expecting to own a home for long periods of time can be better suited selecting a fixed rate. The above included an introduction to adjustable rate mortgages in MA and is meant merely as a reference. Always consult a loan officer for information on individual mortgage options available to you and the differences between them. For further information on adjustable rate home loan programs in MA, contact Christopher Graves at Emery Federal Credit Union via phone at 781-759-1200 x22 or email christopher.d.graves@gmail.com.
