Understanding Adjustable Rates

Understanding interest rates as they relate to mortgage loans is an important part of being a well-informed consumer capable of making the best decisions when it comes to financing your new home.

One choice is an adjustable rate mortgage loan, which offers interest rates that are attached to variable indexes such as that maintained for Treasury securities.

Adjustable rate mortgage loans are a good option for some consumers because, at the beginning of the term of the loan, the rate can be up to two or three percent lower than those offered by a conventional mortgage loan.

However, it is important to keep in mind that this low rate is not guaranteed for the life of the loan. Instead, the interest rate will change at specific points in time, such as every six months, in response to changes in the index to which the interest rate is related.

The time period (or “adjustment interval”) will be specified in your mortgage loan agreement, as will details regarding how, and in relation to what index, the adjusted rate is determined. Your mortgage loan agreement will also include parameters, called “interest caps”, that govern how the rate can change throughout the life of the loan.

Some unscrupulous lenders may try to mislead you by not being upfront about the fact that the attractive rate they are offering will change after a pre-set time period. Consumers who are considering this type of mortgage loan should make sure they completely understand the terms of before they sign any documents, and that they are cognizant of the financial consequences of any scenario regarding their interest rate. On account of being overly optimistic about interest rates, no consumer wants to be placed in a position in which they are unable to meet their monthly mortgage payment.