Adjustable or Fixed? That’s one of the decisions you’ll need
when considering a new mortgage either for a purchase or for a refinance. When
rates are at relative lows and the expectation is to keep the property well
into the future it can make sense to latch onto a fixed rate loan. A fixed rate
loan is much easier to budget for as the home owner knows how much the mortgage
payment will be throughout the life of the loan. It’s easier to plan for. Pick
out a fixed rate term, lock in the rate and forget it. But does that mean an
adjustable rate mortgage is rarely an option? Should borrowers ever even
consider a variable rate loan? The answer, even in times of low rates, is yes.
There are times when an adjustable rate mortgage can be beneficial.
Adjustable rate home loans can have an interest rate change
at various points throughout the life of the loan. For a 1-year loan adjustable
rate loan, the rate can change once per year based upon a preselected index and
an added margin. If the index was 1.25 and the margin on the loan program was
2.00, adding the two together would result in an interest rate of 3.25% and
would remain there until one year later. To protect the borrowers against any
wild swings in the interest rate from one year to the next, adjustable rate
loans have interest rate caps. If the rate cap is 2.00%, no matter how high or
low the index would be one year later, the rate could not move more than the
cap dictates. Borrowers select adjustable rate loans because the start rate is
lower than what is found on fixed rate loans. That’s the advantage. Even if
rates in general begin to climb over time, due to the caps in place it limits
the movement of the rate and therefore the payment.
Today, most adjustable rate programs are found as hybrids
which means the start rate on the loan is fixed for a predetermined period of
time before turning into a loan that can change once per year. The most common
hybrid is the 5/1 where the rate is fixed for five years. Other hybrid options
include 3/1, 7/1 and 10/1. Hybrid start rates are also lower than fixed rate
loans and can be a beneficial option, lowering monthly payments.
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