Adjustable Mortgage Rates: Pros and Cons

FinanceMortgage & Debt

  • Author Allan Young
  • Published December 27, 2009
  • Word count 784

Though adjustable mortgage rates have taken a beating in public opinions due to the recession, they are not necessarily the villains that they have been made out to be. Like any other financial decision adjustable rate mortgages should not be entered into lightly. Before deciding to go with an adjustable rate mortgage you should weigh all of your options. If you are considering an adjustable mortgage rate here are a few things that you should consider.

  • Pro – Using adjustable mortgage rates, lenders are often able to qualify a larger number of borrowers. More individuals can provide wage information to prove that they can afford the initial lowered monthly payments that are characteristic of mortgages with adjustable rates.

  • Con – Adjustable rate mortgages are often lengthy and difficult to understand. So, most individuals do not truly understand the terms of their mortgage. This causes homeowners to feels as though the information they were told was different than the terms that the signed. Borrowers come away feeling tricked when the rate changes.

  • Pro– Individuals with adjustable mortgage rates are able to take advantage of lowered interest rates without having to refinance. In order to take advantage of lower interest rates, homeowners with fixed mortgages rates must refinance, which can become quite costly. So, usually homeowners use the "refinancing rule of thumb," which is you wait to refinance until rates are at least 2% lower than your current rate. Adjustable mortgages rates allow your monthly payments to reflect the lowered interest rates without the homeowner having to do anything. This saves money on the closing costs and other fees associated with refinancing.

  • Con– When interest rates rise, monthly payments can rise sharply with little or no notice, under an adjustable mortgage rate. Homeowners that hit the hardest during the downturn, where those whose monthly payments doubled, and in some cases tripled, seemingly overnight. Even the adjustable rate mortgages that come with an interest cap can have an initial increase that is not covered under the terms of the interest cap.

  • Pro– Adjustable rate mortgages are often good for people who do not plan to stay in that particular home long. Fixed rates are great long term plans. However, if you are not ready to settle down in one area. Adjustable mortgages rates are typically shorter and allow you to save.

  • Con– There are a few of adjustable mortgage rate plans that can do more damage than they are worth. For example Interest Only adjustable mortgage rates allow borrowers to only pay the interest on a loan for a number of years. After this period, monthly payments will increase significantly regardless of the interest rates. Then there are negative amortization loans. The initial monthly payments on this type of adjustable mortgage rate are so low that they may not cover all of the interest. So the unpaid interest is rolled over into the principal balance due.

  • Pro– Just like there are riskier adjustable mortgage rates, there has been a boom in hybrid adjustable mortgage plans. Hybrid plans combine both adjustable rate and fixed rate periods. In theory allowing a borrower to get the best of both words.

  • Con– Unfortunately, some adjustable mortgage rate loans come with prepayment clauses. The lenders behind this type of mortgage plans basically counts on the interest to make a profit. Therefore paying the loan off in short period than the loan tern decreases the profit made by the lender. So, there are often significant fees attached to early loan pay offs due to selling, refinancing, or any other means.+

  • Pro– Adjustable mortgage rates are specifically designed to afford homeowners the ability to save up money. When these mortgages work the way that they are designed, homeowners invest or tuck away the money saved from the initial lowered payments. So that when the interest rate or monthly payments increase, homeowners are prepared to take on the added financial hit.

  • Con– Although these plans work well for some, for most it only works in theory. The hard truth is that most people are unable to actually invest or tuck away the money saved from the low monthly payments. Or, they are able to invest, but loose money in the stock market. Either way, most homeowners are unprepared to the swift monthly payment changes that are possible with adjustable mortgage rates.

For better or worse adjustable mortgage rates can teach you a lot about your spending habits. Some learn that they need to live within their means. A lesson the recession has taught homeowners that were able to qualify for a bigger loan than they could afford. Yet, we all learned that saving for one rainy day does little to stop the flood caused by a rainy year.

Allan Young is a freelance writer who writes about mortgage rates.

Article source: https://articlebiz.com
This article has been viewed 868 times.

Rate article

Article comments

There are no posted comments.

Related articles