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.