Adjustable Rate Mortgages
If you've been trying to buy a house you may have noticed there
are a lot of numbers to consider: the price of the house, your
savings, the amounts of the down payment and monthly payments
you can afford, as well as a host of other figures and fees.
Trying to find a mortgage that meets your needs is another
numbers game, but this one can work in your favor.
You may not realize it, but there is great variety available to
home buyers shopping around for a suitable mortgage. Different
banks, brokers and other lending institutions all offer their
own mix of short-term and long-term mortgages, as well as both
fixed rate and adjustable rate mortgages.
So how do you know which combination is the best for you? That
depends on your circumstances.
Traditional fixed rate mortgages allow you the security and
stability of knowing that your mortgage interest rate will not
fluctuate with market conditions. This means that if interest
rates spike, you will be protected. Conversely, if interest
rates drop, you will not be able to take advantage of the
potential savings without transferring your mortgage to another
institution or making other possibly complicated arrangements.
Adjustable rate mortgages (also known as variable rate
mortgages), are different than fixed mortgages in that the
interest rate you pay on the outstanding principal of your loan
fluctuates according to changes in the posted index rate. There
is a certain amount of risk involved with an adjustable rate
mortgage in that you may end up paying more money in the long
run if interest rates rise and stay high. You also have the
potential to take advantage of savings if interest rates fall.
An additional bonus to adjustable rate mortgage is the lower
initial interest rate. You may be risking higher or unstable
payments, but you are rewarded with a lower interest rate when
your loan is at its fullest point. Unless interest rates rise
dramatically, this advantage is likely to save you more money
than if you had chosen a fixed rate mortgage.
There are advantages and disadvantage to securing an adjustable
rate mortgage loan. However, you may find an adjustable rate
mortgage worthwhile if you intend to pay off a large portion of
your outstanding balance early into your loan period. By doing
so, you reduce the bulk of your loan while paying the initially
lower interest rate. An adjustable rate mortgage may also be the
best choice for you if you anticipate greater future income or
if you intend to pay off the entire mortgage loan quickly again
due to the lower initial interest rate. Even if rates were to
increase early into your mortgage period, the fluctuation would
unlikely be so great that it negated the difference in interest
rates between a fixed rate plan and a variable rate plan.
You can reduce the financial risks associated with an adjustable
rate mortgage by asking your lender about interest rate ceilings
or caps that protect mortgage holders from sharp increases in
the amount of money they must pay each month (or whatever their
payment period is: monthly, weekly, bi-weekly, etc.). The
overall ceiling restriction is legislated in almost all cases,
and it limits the total possible interest rate increases over
the period you hold the loan. Periodic caps help control
interest rate hikes between adjustment periods.
Your lender may also be willing to consider payment caps, which
stabilize your monthly or periodic payments so any interest rate
fluctuations are worked into your payment by way of adjusting
the ratio of principal to interest each payment covers. This is
a great option if you have limited income flexibility, but could
result in a negative amortization period over the long haul.
This happens when the balance of your mortgage is actually
growing rather than shrinking because your regular payments are
not large enough to pay all the interest plus a portion of your
outstanding principal.
A final option to consider is arranging to have the ability to
convert your adjustable rate mortgage into a fixed rate mortgage
at a designated time. You may pay a fee for converting your
mortgage, but if you find yourself in a situation where interest
rates are rising rapidly, it may be worthwhile to stabilize your
payments and balance by switching to a fixed rate plan.
Speak to your financial advisor to find a mortgage plan that
fits your budget and your needs.