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Adjustable Rate Mortgages Overview

There are mortgages that have no fixed rate. This means that it varies in accordance with the ups and downs of interest rates. These adjustable rate mortgages can be very beneficial but they have their disadvantages as well. This article will give you an overview of adjustable rate mortgages and facilitate your decision regarding them.

The interest rate on the market is the major factor that influences the direction toward which the rate of an adjustable rate mortgage moves. When determining the rate on the adjustable rate mortgage a market index such as Prime rate, LIBOR and etc. is used.

There is a direct relationship between mortgage payments and the interest on the loan. This means that the higher the monthly interest rate, the higher your payment will go and vice versa.

Adjustable Rate Mortgages Pros

One of the major benefits of adjustable rate mortgages is the possibility of paying a lower monthly payment due to interest rate fluctuations. Since you are accepting the risk of experiencing rising interest rates the bank may reward you with lower interest rate in the beginning.

Adjustable Rate Mortgages Cons

The advantage of variable rates and can be turned into a disadvantage when the rates rise up. As a result the monthly payment you have to make will significantly increase. The financial burden will be sharpened and a drastically higher payment may result in loan default.

On the other hand, in fixed rate mortgages, the risk is transferred to the bank. If interest rates increase your bank is locked with a below-market rate. If interest rates fall and you are locked with the above-market rate, you can simply refinance and take a loan with a lower rate.

There are various types of adjustable rate mortgages. In order to manage the risks to which you are exposed you should select the right type.

Caps (the amount by which an adjustable rate mortgage can change) are a good way to manage the risks, which your loan may suffer. Caps can be applied on the interest rate. They can be also applied on the payment you have to make every month.

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