Adjustable Rate Mortgages This Home Mortgage Loan May Not Be For The Weak At Heart
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
Adjustable Rate Mortgages: Why This Home Loan Might Not Be for Everyone
Summary
With interest rates on the rise, I felt it was time to explore refinancing options for my mortgage. My first step was contacting my mortgage company.
Article
Following the news of an interest rate hike, I decided to consider refinancing my mortgage. I reached out to my mortgage company.
"I’d like a fixed mortgage rate," I told the broker.
"Why is that?" the broker asked.
"I'm not willing to risk rising interest rates. At my age, I can't afford it."
The broker noted, "Over the last ten years, you’ve benefited from an adjustable rate, paying less interest than most with fixed loans. Perhaps we should consider adjustable rates that are currently even lower than what you're paying, with caps to protect against hikes. You could save a few hundred dollars monthly."
I firmly responded, "No thank you. I'm only interested in fixed-rate mortgages."
"Are you sure you don't want to save money?" the broker pressed before launching into a detailed discussion of economic trends, budgeting tips, and optimistic forecasts.
I explained that I remembered the high 18%-19% interest rates of the early 1980s?"a time he seemed too young to recall. On a $100,000 loan, an 18% interest rate means $1,500 in monthly interest alone. For a $200,000 loan, that amount jumps to a staggering $3,000.
The broker likely thought my concerns were outdated, and we ended without resolution. The issue wasn’t just about fixed versus adjustable rates. It was about differing perspectives shaped by age, experiences, expectations, hopes, and fears.
Let’s explore adjustable rate mortgages (ARMs) further. Generally, they offer lower rates than fixed-rate loans, translating to lower payments and easier qualification.
Lenders assess your mortgage application based on what percentage of your income covers the loan payment. For example, with a $5,000 monthly income, a $2,000 loan payment is 40%, while a $1,000 payment is 20%. The closer you get to the lower percentage, the easier your qualification. This appeals to young professionals and those with limited income looking to save on initial payments.
Younger borrowers, often optimistic about income growth and potential home moves, may prioritize affordability over long-term concerns. For them, buying is preferable to renting, which they view as a financial drain.
Some older individuals, impacted by credit setbacks or low income, might find fixed rates unaffordable due to higher credit-induced rates. For them, ARMs offer a viable path to homeownership.
Key ARM Terms:
- Margin: The lender’s profit markup, added to the index rate to determine your total interest rate.
- ARM Indexes: Benchmarks used to adjust the mortgage. Stability in the index can mean a more stable loan. Consider both index and margin when shopping around.
- Adjustment Period: The time frame during which your rate remains unchanged. For example, a 5-1 ARM holds the interest rate for five years, with annual adjustments thereafter.
- Interest Rate Caps: The maximum rate a lender can charge.
- Periodic Caps: Limits on how much your rate can increase within an adjustment period, though not all ARMs include these.
- Overall Caps: Legal limits on rate increases over the loan’s lifetime.
- Payment Caps: Caps on how much your monthly payment can rise at each adjustment.
- Negative Amortization: Occurs when payments don’t cover the interest, increasing your loan balance. This can happen with certain payment caps.
When comparing lenders and options, remember Henry Moore’s insight: "What's important is finding out what works for you."
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You can find the original non-AI version of this article here: Adjustable Rate Mortgages This Home Mortgage Loan May Not Be For The Weak At Heart.
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