Adjustable Rate Mortgage

With an understanding of fixed mortgage interest rates, it’s time to understand the opposite: adjusted mortgage rates. This means the interest will change based on the index of the credit market. Initially the loan is offered at a standard base rate, which changes going forward. This type of loan goes by a few different names, including a variable rate mortgage or a tracker mortgage. However, in the United States is most commonly referred to as the adjustable rate mortgage. Each lender may set the terms of an adjustable rate mortgage loan, to a certain extent. Those terms are not as straightforward as the fixed loans; here are a few different factors you’ll need to understand.


How your rate is determined

The initial interest rate of an adjustable mortgage loan is the initial interest on the loan. This period is the length of time during which the adjustable interest rate remains the same. At the end of this period, the interest on your loan is recalculated and it can go up or down based on the index rate, which is the indicator many lenders use to determine their interest rates. The margin is any percentage points added to the index. This rate can also be capped at the end of each adjustment period.


How your payments increase or decrease

Once your interest rate is determined, it can only be changed at the end of the adjustment period. There are discounts that are usually offered in the first year of your loan, but they will only impact the interest rate, not the actual balance of the loan.


Negative amortization, conversion, and prepayment

Negative amortization means that your loan balance is increasing. It only occurs in certain situations, where the monthly payments aren’t big enough to pay the interest. A conversion will allow you to potentially convert an adjustable mortgage to a fixed mortgage. Prepayment terms are important to be aware of when you are paying off an adjustable mortgage loan. These terms outline what happens if you pay off your loan ahead of the agreed time; 10-year adjustable rates may come with penalties if they are paid off quicker.

Clearly there is a lot to comprehend when it comes to these adjustable mortgage interest rates. Going over everything with your lender before you sign anything is the surest way to make sure you are getting the best deal and the best rates you could get for your situation.

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