Lenders designate Adjustable Rate Mortgages with a series of numbers. You will see loans designated 1:1, 3:2 or even 5:1. These numbers tell you the number of years your mortgage will have a fixed rate and how frequently after that your interest rate will be changed after that. For example a 1:1 mortgage carries a fixed interest rate for the first year. After the first year your interest rate will be recalculated every year. Before selecting a mortgage with an adjustable interest rate to finance your home you need to understand the risks associated with these loans. If you fail to consider the risks you could find yourself with an unmanageable mortgage payment once your loan begins adjusting. In most market conditions adjustable rate mortgages loans offer lower interest rates than traditional fixed interest rate loans. There is a condition in the market place called an inversion where short term interest rates go up faster than long term interest rates. When this happens Adjustable Rate Mortgages can have higher rates than long term fixed interest rate mortgages. Market inversions are rare; unfortunately, the year 2006 started with this interest rate inversion. The danger to consider with an Adjustable Rate Mortgages is the risks associated with these loans. Your interest rate could go up during unfavorable market conditions. When this happens your monthly payments will go up as well. When your payments go up you could find yourself unable to manage the mortgage and you could potentially lose your home to foreclosure. If you are uncomfortable with this risk you should steer clear of Adjustable Rate Mortgages and stick with a traditional fixed rate mortgage loan. |
