Adjustable Rate Mortgages

An adjustable rate mortgage is a loan type that offers a lower initial interest rate than most fixed rate loans. The trade off is that the interest rate can change periodically, usually in relation to an index, and the monthly payment will go up or down accordingly.

For many people in a variety of situations, an adjustable rate mortgage is the right mortgage choice, particularly if you only plan on being in the home for initial number of years during which the interest rate is locked (typically 5, 7 or 10 years).  Here’s some detailed information explaining how an adjustable rate mortgage works.

Adjustment Period

With most adjustable rate mortgages, the interest rate and monthly payment are fixed for an initial time period typically 5, 7 or 10 years.  After the initial fixed period, the interest rate can change every year. For example, one of our most popular options is a 5-year adjustable rate mortgage. The interest rate will not change for the first five years (the initial adjustment period) but can change every year after the first five years.

Index

Our adjustable rate mortgage interest rate changes are tied to changes in an index rate. Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. The current value of most indexes is published weekly in the Wall Street Journal. If the index rate moves up, then so does your mortgage interest rate, which means you’ll probably have to make a higher monthly payment. On the other hand, if the index rate goes down, then your monthly payment may decrease.

Margin

To determine the interest on an adjustable rate mortgage, we’ll add a pre-disclosed amount to the index called the “margin.” If you’re still shopping, comparing one lender’s margin to another’s can be more important than comparing the initial interest rate since it will be used to calculate the interest rate you will pay in the future.

Interest-Rate Caps

An interest-rate cap places a limit on the amount your interest rate can increase or decrease. There are two types of caps:

  1. Periodic or adjustment caps, which limit the interest rate increase or decrease from one adjustment period to the next.
  2. Overall or lifetime caps, which limit the interest rate increase over the life of the loan.

As you can imagine, interest rate caps are very important since no one knows what can happen in the future. All of the adjustable rate mortgages we offer have both adjustment and lifetime caps. Please see each product description for full details.

Negative Amortization

“Negative Amortization” occurs when your monthly payment changes to an amount less than the amount required to pay interest due. If a loan has negative amortization, you might end up owing more than you originally borrowed. None of the adjustable rate mortgage options we offer allow for negative amortization.

Prepayment Penalties

Some lenders may require you to pay special fees or penalties if you pay off the adjustable rate mortgage early. We never charge a penalty for prepayment.

Accunet’s licensed Loan Consultants can help you evaluate and compare various adjustable rate mortgage loans to fixed rate options.