Welcome to the Logix SmartLab

Is an Adjustable Rate Mortgage for You?

Posted by Admin on 10/9/2015

 

Time to talk about Adjustable Rate Mortgages, the more flexible member of the mortgage family.

See, with a conventional fixed rate mortgage, your interest rate is locked in.  And that means if you have a 30 year fixed loan, the interest rate today will be the same as 30 years from now when you pay it off.

But with an adjustable rate mortgage, your rate can go up or down.

But your interest rate can only change by so much, and only every so often.

In return for that risk, you’re rewarded with a lower interest rate.

Why do they go up and down?  Because Adjustable rate mortgages are tied to something called an index.

It might be the one year Treasury bill, it might be the prime rate.  Whatever it is, you need to know what your index is before you sign up for the loan.

Since indexes are financial numbers that can move that means if the index goes up, your rate can go up.

But if the index goes down, your rate can go down.

Adjustable rate mortgages usually come with two numbers associated with them, like 5/1.  What do those numbers mean?

The first number means how long you have until the interest rate adjusts, in this example, 5 years.

The second number indicates how frequently the rate will adjust after that, in this case every year.

And there’s a cap, and that means you’re protected so your rate can only go so high.

Say for example, your rate has a cap of 4%.   Just add that to your initial interest rate, and that the highest your rate can go over the life of the loan.

It’s that initial lower interest rate that makes adjustable rate mortgages a good deal for someone who’s not going to be in a house long term. 

So if you’re thinking you’re only going to be in a property for 5 years, you might want to consider an adjustable rate mortgage, and get a firm grip on those savings.

Topics: Consumerism, Home Loans

Meet the blogger

Hi there! Come on in.

Feel free to peruse about. Here you’ll find stories, posts and tools aimed to assist you as you’re faced with daily to once-in-a-lifetime financial quandaries. This is your SmartLab (lab coat optional). We want you to get the most from our articles, and we welcome your ideas to help us continue to bring valuable content to you. Check out the comment section at the bottom of every post for easy ways to share feedback. We’re learning, too, and what better way to encourage smarter banking than to share tips and resources with each other? Not to mention, it’s a great chance for us to get to know each other!

Subscribe to Email Updates

Recent Posts