Link to this page Print RSS  

Benefits and Drawbacks of Adjustable Rate Mortgages

01/07/2011

There are many loan options available to choose from to fund your home purchase.  Some loans are fixed rate mortgages and others come with rates that adjust upward or downward over time.  This latter type of mortgage is called an adjustable rate mortgage.  There are benefits and drawbacks to this mortgage type.

Benefits

Some of the benefits of the adjustable rate mortgage type are listed here.  These benefits enable many homebuyers to secure solid low rates at low costs to finance their homes.

• Low initial mortgage rates for a set period of time.  The lowest mortgage rates available on the market are tied to adjustable rate mortgages.
• You may save money if the market rate decrease in the future, as this will adjust your mortgage rate downward.
• Ceilings, adjustment periods, and rate caps keep mortgage rates bearable over time.  It’s a misconception that mortgage rate on adjustable loans always leap higher and higher over the course of the loan.  Your lender does not want to force you into foreclosure.

Drawbacks

There are some substantial drawbacks to adjustable rate mortgages.  These are listed here.

• Your rate will likely adjust upward and you’ll have to pay a higher rate than you planned on paying.
• You won’t be able to make financial plans for the future around your mortgage because there’s no way to know where your rate will be in ten years.

These are the primary drawbacks to the adjustable rate mortgage.  If your rate climbs upward and you’re unable to make your payments, your credit score will be damaged and you may lose your home.  But if you’re willing to take this risk or you plan to refinance within the next few years, an adjustable rate mortgage can get you a solid low rate on your mortgage.

Link to this page Print RSS