Mortgages come in many flavors and various types adjustable rate mortgages. Adjustable rate mortgages are usually referred to as ARM's. They differ from fixed rate mortgages in that the initial interest rate can change. Many people are unaware of the basic mortgage fact.
Almost always, ARM's have rates which go up, not down. Therefore, if you take out an adjustable rate mortgage you should be well prepared for your interest rate to go up. When your interest rate goes up, then your mortgage payment can increase significantly.
Some ARM's have minor adjustments. Others can be more severe. The worst of them are called "teaser rate" mortgages. These loans come with exceedingly low initial interest rates. Sometimes they can even be under one percent. However, borrowers must beware. Things that seem too good to be true oftentimes are.
These initial very low rates often shoot up to the highest mortgage rates to be found. Borrowers find that their mortgage payment sometimes doubles, or goes up even more. If your payment amount exceeds your income, then the result is clear. In the worst scenarios. borrowers were tricked into these mortgages with the reset clauses hidden in the fine print.
The way to arm yourself against the occurrence is to seek information and to always read your mortgage documents no matter how tedious it is. Always know which type of interest rate you have. If it is an adjustable rate, then it becomes doubly important to read all the details. You need to understand fluently exactly how your rate adjusts.
Most adjustable rate mortgages adjust on a set schedule and are tied to a published benchmark rate. Although you won't know how much it will go up, you will know when it will happen. Your loan documents will disclose how much above this benchmark rate you will pay. You need to research the normal range of this rate and calculate what you project your payment will be after future adjustments.
As indicated, a fixed rate mortgage never changes. The interest rate usually is higher than the introductory rate on most adjustable rate mortgages. However, into the future it is often possible that the adjustable rate will exceed the fixed rate. For those looking to own their home for a long time a fixed rate is most advised.
Myriad types adjustable rate mortgages exist and need to be studied. Do not fall victim to tricky adjustable rate loans. Always have an idea of what your payment will be into the future. Failure to do this research can put you into hot water.
