Variable rate mortgages are used by many borrowers due to the lower loan payments initially. The interest rate may be below fixed rates available at that time, but this is not always the case. Buyers must examine the terms of these mortgages and how they differ from fixed rate alternatives. This article offers an introduction to variable rate mortgages in Waltham MA.
An Introduction To Variable Rate Mortgages In Waltham MA
Rates and Time Periods
Variable rate mortgages start at a lower interest rate for a certain number of years and then adjust at specific times thereafter. For example, a 5-1 ARM may stay at the same rate for the first five years and adjust every one year thereafter. The fixed rate period and the intervals at which it will change are different for each loan. It is also common that a short fixed period of time will have a lower starting rate than a long one.
Indexes and Margins
Rates on variable rate mortgages are generally measured by an independent index and are outlined in the mortgage terms. Most refer to a national mortgage index, which is based on lending patterns in the country. The rate can either go up or down depending on that index and a particular margin on top of it (as referenced in the financing terms). Indexes constantly move, so future rates remain unknown until the actual adjustment date arrives.
Most mortgages also mention a rate cap. Rate caps limit the amount by which the rate on a mortgage may increase at a given time. There may be a rate cap for every adjustment period and for the duration of the loan. For example, a 5-1 ARM with a 2 percent cap will maintain the same rate for the beginning five years and can rise no more than 2 percent each year thereafter. If there were a 6 percent lifetime cap, then it may never increase any more than six percent above the initial rate. Rate caps protect borrowers from extreme increases in loan payments each year and are essential to consider.
Pros and Cons of Variable Rate Mortgages
Variable rate mortgages include lower payments in the first few years and may make home buying affordable to more buyers (or allow them to buy a more expensive property). When rates are high, the difference between fixed and variable rate mortgages may be considerable, making them even more appealing. However, there are also risks because of the potential increase over time. Home buyers expecting to live in a home for many years may be better off selecting a fixed rate. This blog contains an introduction to variable rate mortgages in Waltham MA and is meant only as a reference. Consult a loan officer for information on special loan programs you should consider and how they match up to one another.