An adjustable rate mortgage loan is a loan with an interest rate that is occasionally adjusted according to a financial index. Regardless of the lender, an adjustable rate mortgage loan will always have basic, common features. For example, there will be an initial interest rate at the beginning and an initial discount. This usually takes the form of an interest rate concession. There is an index rate that is based on standard financial industry indexes. These include Treasury securities or a national average cost of funds index.
In addition, there is the adjustment period, which is the time that the interest rate or loan period will not change. Finally, there are special agreements like conversion, which lets the buyer convert their load to a fixed rate, and the prepayment, which is a penalty for trying to pay the loan off early.
This adjustable rate mortgage loan is different from fixed-rate mortgages, which have set interest rates. Adjustable rate mortgage loans are sometimes preferred because they may start out with lower monthly payments. However, the monthly payment could either increase or decrease. In addition to this, at the end of the loan, the person may end up owing more money than originally borrowed. Keep in mind that the prepayment clause may incur a final penalty payment.
Adjustable rate mortgage loans have higher risk but also higher potential benefits. For example, the starting interest rate will be lower and recent years have shown that interest rates have remained stable and low. This means that people who currently have an adjustable-rate mortgage loan will enjoy the same interest rate as a fixed mortgage or possibly see their rate be adjusted downwards.
People are often concerned about having an uncontrolled rate that adds potential financial risk, but there is no need to worry. Most adjustable rate mortgage loans have two different forms of caps: a yearly cap and a lifetime cap. The yearly cap limits the increased amount of the rate in a given year. The lifetime cap limits the increased amount of the rate during the lifetime of the loan.
Overall, an adjustable-rate mortgage loan offers excellent benefits with manageable risks.