Adjustable Mortgage Rate 101
Adjustable mortgage rate is an index where mortgage interest rates are based and adjusted for a given time frame. During interest rate fluctuation, you can take advantage of this time to avail an adjustable mortgage rate especially when rates are going down.
Mortgage interest rates change from time to time- either every one or three or five years. If you are a borrower, you may want to capitalize on the new interest rates that are basically lower than the previous one.
If your mortgage was given at a specific rate and then interest rates fall, your payments will be recalculated based on the new lower rates. If interest rates increase, mortgage rates will do so too. Rates offered at the onset of your mortgage are usually lower than the existing market rates. Thus, the first rate adjustment can significantly change your monthly payments.
A cap usually limits the maximum amount that the rate can change to. It also varies from the original rate during the course of the loan. Other adjustable mortgage rates also have payment cap that limits the maximum amount of payment during the duration of the loan. This cap is dollar-specific.
Some adjustable mortgage rates offer conversion option to allow borrowers to convert their current rates into fixed rates. This conversion allows flexibility for borrowers to take a loan while rates are going down.
Since varied adjustable mortgage rates rely on different economic aspects, you can expect your mortgage to go up and down during the duration of your loan.
Common Types of Adjustable Mortgage Rate (AMRs)
• 1 Year AMR – The monthly dues and mortgage interest rates are changed each year for the entire 30-year term loan.
Here are reasons why you should opt for a 1 year AMR:
o If you want the lowest mortgage interest rate possible
o If you are okay and ready for annual mortgage changes
o If you cannot qualify for higher mortgage rate plans
• 3/1 and 3/3 Year AMR – The monthly dues and mortgage interest rates remain the same within a period of 3 years. On the 4th year and onwards, mortgage rates are modified annually (3/1 AMR) or every 3 years (3/3 AMR).
• 5/1 and 5/5 Year AMR – The monthly dues and mortgage interest rates remain the same within a period of 5 years. On the 6th year and onwards, mortgage rates are amended annually (5/1 AMR) or every 5 years (5/5 AMR).
• 10/1 Year AMR – The monthly dues and mortgage interest rates remain the same within a period of 10 years. On the 11th year and onwards, mortgage rates are modified annually.
Reasons why you should opt for a 10 Year AMR:
o If you plan to live more than 10 years in a specific home
o If you wish to have a stable initial payment
o If you plan to move within 10 years
o If you would like the loan to be in effect in case you changed your mind from moving
You have these options to choose from when considering adjustable mortgage rate. Given the right conditions and your financial situation, you can benefit from whichever option you choose.
MortgageLenders :: Jun.12.2008 :: Mortgage Rates ::