Adjustable rate financing programs are considered by many borrowers due to the lower loan payments in the first years of the mortgage. The rate can be much lower than the fixed rates, but this is not always the case. Home buyers should understand the terms of these mortgages and how they compare to fixed rate options. This blog offers an overview of adjustable rate financing programs in Burlington MA.
An Overview Of Adjustable Rate Financing Programs In Burlington MA
Rates and Time Periods
Adjustable rate financing programs have a lower interest rate for a set number of years and may adjust at specific times afterwards. For example, a 5-1 ARM may offer a fixed rate for the beginning five years and change every 1 year after. The number of years during which the rate is fixed and the periods at which it will adjust differ for each loan. It is also possible that a shorter fixed period of time will have a lower initial rate than a long one.
Indexes and Margins
Rates on adjustable rate financing programs are typically based on a publicly published index and are detailed in the terms of the mortgage. Many rely on the US mortgage index, which reflects borrowing patterns throughout the country. The rate could either increase or decrease based on that index and a particular margin on top of it (as set by the loan terms). Indexes constantly move, so future interest rates will be a mystery until the specific adjustment time arrives.
Most mortgages reference a rate cap. Rate caps restrict the amount by which the rate on a loan can fluctuate. There may be a rate cap for each adjustment interval and for the life of the the loan. For example, a 5-1 ARM with a two percent cap will maintain a fixed rate for the beginning 5 years and may go up no more than two percent every year thereafter. If there were a 6 percent lifetime cap, then it may not increase any more than 6 percent above the initial rate. Rate caps protect home owners from extreme changes in mortgage payments from year to year and are essential to consider.
Pros and Cons of Adjustable Rate Financing Programs
Adjustable rate financing programs allow lower payments initially and can make home ownership affordable to more individuals (or allow them to buy a higher-priced property). When interest rates are high, the gap between fixed and adjustable rate financing programs can be high as well, making them even more appealing. However, there are also risks because of the potential increase over time. Buyers expecting to live in a property for extended time frames can be better off selecting a fixed rate. This blog contains an overview of adjustable rate financing programs in Burlington MA and is intended only as a reference. Speak with a loan officer for information on particular mortgage alternatives you should consider and the differences between them.