First of all, what is an Adjustable Rate Mortgage? Unlike a fixed rate mortgage where the interest rate and the payment amount do not change for the duration of the loan, an Adjustable Rate Mortgage changes the interest rate and the payment amount at regular intervals over the course of the loan.
The interest rate of an Adjustable Rate Mortgage goes up and down according to market conditions; this interest rate is tied to some financial index and the lender will add their own markup to that value. Adjustable Rate Mortgages typically come with an introductory period where the interest rate is fixed. At the end of the introductory period the interest rate is adjusted by the lender at regular intervals.
The changes to your Adjustable Rate Mortgage depend largely on the index it is tied to. Nearly half of the Adjustable Rate Mortgages issued are tied to the index that tracks one year Treasury Bills. If your Adjustable Rate Mortgage is tied to this index your interest rate and monthly payment will follow this index. There are several other indexes used by mortgage lenders; if you are not sure which index your mortgage tracks, check your loan contract or contact your lender.
The fixed introductory period is an important aspect of your mortgage you need to be familiar with. Fixed periods vary from 1 to 5 years, sometimes longer. During the fixed period your loan behaves like a fixed rate mortgage. At the end of the fixed period the lender will adjust your interest rate at periodic intervals; this interval is called the Adjustment Interval and is important to know because your monthly payment will change at the end of each adjustment interval. Adjustment intervals are typically every one to five years.
You should familiarize yourself with your loan contract to see if the lender has included any caps to the interest rate. Caps protect the homeowner form excessive increases. Caps can apply to interest rate changes and increases in the monthly payment amount. If your Adjustable Rate Mortgage does not have rate caps consider refinancing at the end of your fixed rate period.
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Albuquerque Mortgage Refinance
Louie Latour has twenty years of experience in the mortgage industry as a mortgage broker. He is the owner of Mortgages Refinance Advisor, a mortgage help site devoted to saving homeowners money with a free guidebook Mortgage Refinance: What You Need to Know.
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