Adjustable Rate Mortgages

When Adjustable Rate Mortgages Make Sense

With rates at a 50 year low many homeowners have decided to refinance to lock in at the low rates. Those who were considering buying their first home or another home also decided to get off the fence and take advantage of the really low interest rates.  With the chance to lock into really low rates is it possible that an adjustable rate mortgage would ever make sense?

What is an Adjustable Rate Mortgage?

An adjustable rate mortgage is a mortgage loan in which the interest rate may adjust periodically. The interest rate will adjust according to market trends along with changes in some indices.

Many of the adjustable rate mortgages were being sold before 2007 as a credit repair type loan in the state of Utah. Adjustable rate mortgage programs entailed the borrower getting an initial lower fixed interest rate for the first two or three years of the loan. The first two or three years were considered a trial period, giving the borrower time to make at least 24 months of on time payments to get their credit back on track. After the initial trial period was over, the loan would begin to adjust, and would simply adjust according to the market’s activity.  The challenge for many borrowers was that they would let the loan go into the adjustable period to see what type of payment they would end up with, and when the payment would go up it would become less manageable resulting in slow pay or no pay at all.

Reasons to Consider an Adjustable Rate Mortgage

Although the housing market has been extremely volatile and interest rates are low enough for families to lock in at low fixed rates, there are still some circumstances in which the adjustable rate mortgage programs do make sense. One primary example of when an adjustable mortgage is appropriate is when the head of household is placed in a job that may change location within a few years time. Corporate jobs and even some retail management jobs are like this in the state of Utah. Adjustable rate mortgage programs are beneficial to those who know they will be moving again within two to three years, and allows the borrower to take an initial lower interest rate. The idea is that the property will be sold before the loan goes into the adjustable period, thus the family wouldn’t have to worry about refinancing the loan.

Those who are buying investment properties for resale may also wish to use the adjustable rate mortgage, simply because they won’t be living in the property and will more than likely sell it within 12 to 24 months. This gives the investor time to make improvements on the property, and then get it listed. This is ideal for investors that aren’t paying cash for the properties.

Although the market seems to be heading in a fixed rate direction, adjustable rates are still available.



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