Consumers’ Guide to Adjustable Rate Mortgages

Consumers’ Guide to Adjustable Rate Mortgages

Sep 15, 2016 (0) comment

Choosing the right mortgage loan that fits with your financial goals is one of the most crucial aspects of applying for a loan. First time home buyers have various options to choose from, however, they need to consider their requirement, budgetary constraints, credit standing, objectives, and more before they choose any loan option.

To better understand how to choose the right plan for you, let’s first understand an adjustable mortgage loan.

What is An Adjustable-Rate Mortgage?

In simple terms, an adjustable-rate mortgage is a mortgage loan where the interest rate varies according to market prices. There are many varying types of ARM loans, from 1 year to 10 years, with almost all being amortized over a 30-year period. However, many ARM loans have a fixed rate at fixed initial years; these loan programs are also referred to as ‘hybrid loans’.

How Does An Adjustable Rate Mortgage Work?

As mentioned above, initially, you need to pay a fixed rate for a pre-determined length of time, which will be followed by a fluctuating rate determined and influenced by the market conditions. A great benefit of this type of loan is that the interest rate is lower than a fixed-rate mortgage loan, and in times of deflation, this interest rate may go down, benefiting the client paying off the loan. However, there is an equal amount of risk that will be posed in a case of the market rate going up and you may end up paying a much higher amount than a fixed-rate loan. These rates are subject to a maximum rate, or Cap Rate, beyond which the interest rate will not be adjusted; this creates a limit that the rate can be increased by, protecting you from an extremely high inflation of your rate. A Periodic Maximum Rate puts a limit on how much the interest rate can change over a given period of time and a Lifetime Maximum Rate puts a limit on how much your interest rate can change over the lifetime of the loan.

Types of Adjustable Rate Mortgage

A variety of options are available for this type of loan and you can choose the one which best suits your requirements

  • 10/1: A fixed rate for 10 years, and a fluctuating rate for the remaining period, which adjusts every year.
  • 7/1: A fixed interest rate for 7 years, followed by an adjusted interest rate every year.
  • 1 Year: A fixed interest rate for 1 year, followed by adjusted rates as per maximum (cap).

Drew Mortgage Associates are renowned Mortgage Brokers located in Boston, Massachusetts. With expert mortgage agents, their services can help you pick the right plan and qualify for an adjustable mortgage loan. For more information, please visit: https://www.drewmortgage.com/adjustable-rate-mortgage/

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