Do you need to get a mortgage to purchase a home, and are considering an adjustable-rate mortgage? If so, it will help to know the following four things about it.
ARMs Have Low Initial Payments
While you may assume that an adjustable-rate mortgage is going to be constantly changing by the name alone, know that the initial payment period is going to have a lower initial interest rate when compared to a traditional 30-year mortgage. This can make the mortgage payments more affordable during the fixed-rate period before the rate starts adjusting. If you know that you want to sell the home within the fixed-rate period, this is a great way to save money.
ARMs Can Have Early Payoff Penalties
However, be aware that an adjustable-rate mortgage may have a penalty if you do decide to pay off the mortgage early, either by paying it off completely or refinancing to a different type of mortgage within a set number of years. You'll need to weigh the cost of the penalty against what you've saved over that fixed-rate period, and then determine if paying the fee will be worth it in the long run.
That said, you can still make additional payments towards the principal to reduce how much interest you pay over time. You'll be able to avoid penalties as long as you hold the mortgage long enough according to the terms.
ARMs Can Change The Interest Rate Up or Down
Once the fixed-rate period is over, your interest rate is going to change by going either up or down. Unfortunately, it can be impossible to predict what the interest rate will be once the adjustment period starts. A mortgage lender can provide more information about what financial indexes your interest rate will be tied to and how it can impact what you pay each month.
ARMs Have Adjustment Caps
Be aware that your interest rate with an adjustable-rate mortgage does have limitations. Your mortgage terms will state the maximum amount that the mortgage is allowed to go up or down at each adjustment period, as well as a cap of how much the mortgage can change over the life of the loan. Make sure that you understand where your mortgage can potentially go in terms of the monthly cost and if you can afford it.
Still feel confused about adjustable-rate mortgages? Reach out to a lender in your area for more information. They can walk you through the advantages of this mortgage product so you can learn about if it is right for you.
For more information on home loans, contact a professional near you.