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Understanding an
Adjustable Rate Mortgage
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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.
About The Author:
Peter Dobler is a veteran in the IT business. His passion for experimenting
with new internet marketing strategies leads him to explore new niche
markets.
Read more about his experience with credit and mortgages; visit
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