An adjustable rate mortgage is exactly what the
name implies; a home mortgage loan with an interest rate that gets adjusted
during the life of the loan.
If you go out looking for an adjustable rate mortgage, the lender will usually
have two numbers associated with the loan offer; such as 5:1, 1:1, or 3:2. These
are some common numbers associated with adjustable rate mortgages, but there are
others as well.
The first number indicates the number of years that the adjustable rate mortgage
will operate like a fixed rate mortgage until it comes up for its first interest
rate review. The second number indicates the interval at which the mortgage will
be reviewed thereafter. Fox example a 5:1 adjustable rate mortgage means that
the interest rate given at the time of securing the loan is guaranteed for the
first five years of the mortgage, and then the rate will be reviewed and
adjusted in one year intervals.
When seeking a home mortgage loan you will have a choice of adjustable rate
mortgage, like we described above, or a fixed rate mortgage. Unlike an
adjustable mortgage, a fixed rate mortgage will remain at the same interest rate
for the entire life of the loan.
Before choosing an adjustable rate mortgage, it is important to understand that
they have both advantages and disadvantages and the choice of which type of
mortgage is best for you will be largely determined by the current market as
well as your own situation.
Advantages of Choosing an Adjustable Rate Mortgage
By far, the greatest advantage of an adjustable rate mortgage is that is usually
offered at a lower interest rate than a fixed rate mortgage loan. Because the
mortgage lender does not have to guarantee the interest rate for the entire life
of the loan, he or she is much freer to offer the lowest possible interest rate.
Therefore, if you do not intend to hold your mortgage for more than a few years,
it might be worthwhile to choose an adjustable rate mortgage and get the lowest
rate possible.
There is another advantage to an adjustable rate mortgage, but it is present
only in a high interest rate market. If you are securing a mortgage during a
time when the mortgage rate being offered is high, by choosing a fixed rate
mortgage you would be locked to that high rate for the entire life of the loan.
If you choose an adjustable rate mortgage; however, when the market comes back
down, your mortgage rate will come down as well.
Disadvantages of Choosing an Adjustable Rate Mortgage
The main reason that many borrowers will not even consider an adjustable rate
mortgage is because of the risk level involved with this type of borrowing. With
an adjustable rate mortgage, not only is there the chance that your interest
rate and monthly mortgage payments will go down, but there is also the chance
that they will go up.
For the homeowner who is not comfortable with the risk, and needs to know that
their monthly mortgage payments will never change, an adjustable rate mortgage
would not be the best choice.
This article provided courtesy of http://www.fha-loan-guide.com