Adjustable rate financing programs are attractive to many home buyers because of the lower monthly payments at the beginning. The rate may be below fixed rates, but this is not always true. Home buyers must evaluate how these loans work and how they differ from other options. This blog offers an introduction to adjustable rate financing programs in Ipswich MA.
An Introduction To Adjustable Rate Financing Programs In Ipswich MA
Interest Rates and Time Periods
Adjustable rate financing programs have a lower interest rate for a certain number of years and then adjust at specific times afterwards. For example, a 5-1 ARM may stay at the same rate for the beginning 5 years and alter every year thereafter. The fixed rate period and the periods at which it can fluctuate are different for every loan. It is also possible that a shorter fixed time frame may offer a better initial rate than a longer one.
Rates on adjustable rate financing programs are usually determined by a publicly published index and are detailed in the mortgage terms. Many refer to a US mortgage index, which reflects borrowing expenses throughout the country. The interest rate could either rise or fall based on that index and a specific margin on top of it (as outlined in the financing terms). Indexes continually change, therefore future rates remain unknown until the actual adjustment date arrives.
Most mortgages also mention a rate cap. Rate caps limit how much the rate on a loan may increase at a given time. There can be a rate cap for each adjustment interval and for the duration of the mortgage. For example, a 5-1 ARM with a 2 percent cap will include the same rate for the beginning five years and may increase no more than 2 percent every subsequent year. If there is a six percent lifetime cap, then it may not increase any more than six percent above the starting rate. Rate caps protect borrowers from extreme increases in loan payments each year and are essential to consider.
Pros and Cons of Adjustable Rate Financing Programs
Adjustable rate financing programs include lower payments in the first few years and can make home ownership possible to more buyers (or enable them to select a more expensive property). When interest rates are high, the gap between fixed and adjustable rate financing programs may be considerable, making them even more desirable. However, there are also risks because of the potential increase over time. Home buyers expecting to own a property for long time frames can be better off selecting a fixed rate. The above included an introduction to adjustable rate financing programs in Ipswich MA and is intended only as a reference. Always consult a mortgage professional for information on particular financing alternatives available to you and how they differ from one another.