You found your dream house; however, qualifying for a traditional fixed rate mortgage is proving to be difficult. Your debt-to-income ratio may be too high or your credit score might be too low. The same might be true of the existing mortgage holder that wants to refinance and cash out equity in their home.
Using an adjustable rate mortgage could allow you to qualify for for your dream house or tap your equity for needed cash. The risk involved with adjustable rate mortgages, especially when interest rates are rising, requires you to do your homework before committing to a loan; this will allow you to avoid common mistakes and protect yourself from economic uncertainty.
Adjustable Interest Rate Loans
Adjustable rate loans are simply that; a mortgage with an interest rate that changes over time. The loan is tied to an economic index. When the index rises and falls, the interest rate rises and falls with it. Your mortgage lender will set your interest rate based on the value of the index plus their own markup.
Adjustable rate mortgages are popular for two basic reasons: very low initial payments and easier qualification criteria. In the beginning the monthly payments are also smaller. As a short term fix to a financial need the risk involved with an adjustable rate mortgage is minimal. As a stop gap measure you can use this mortgage to secure the cash you need.
Minimize Your Risk With Rate Caps
Make sure the adjustable rate mortgage you choose comes with favorable caps. Caps protect you from excessive changes in your interest rate and monthly payment amount. The lower the caps are set on your loan the more you are protected from rate hikes; however, this protection comes with a price. The more favorable the caps, the higher your interest rate will be. You need to select a mortgage that balances the interest rate with the cap level that meets your acceptable level of financial risk.
Find The Mortgage Right For You
As a homeowner you need to do your homework and shop for the mortgage that is best for you. Adjustable rate mortgages should be used as a stop-gap measure to give you time to secure better financing. By protecting yourself with favorable terms you can save money with adjustable rate mortgages, even when interest rates are rising.
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Louie Latour has twenty years of experience in the mortgage industry as a mortgage broker. He is the owner of Mortgages Refinance Advisor, a mortgage help site devoted to saving homeowners money with a free guidebook