3 Tips On Taking Out An Adjustable Rate Mortgage Loan

Adjustable rate mortgages can be risky because they leave borrowers susceptible to the vagaries of market changes that could cause higher interest rates. However, there can be advantages to adjustable rate mortgages depending on a homeowner's unique situation. 

Understanding the terms you're being offered when a lender proposes an adjustable rate mortgage is important to finding the best possible home loan. Being aware of the following tips on taking out an adjustable rate mortgage can allow you to capitalize on this mortgage loan product and avoid the drawbacks:

Be aware of the margin a lender is offering

The interest you'll pay on an adjustable rate mortgage is broken up into two different factors: the index rate and the margin. The margin is the interest rate the lender adds on top of the index rate. 

When you're evaluating offerings of adjustable rate mortgages from various lenders, the margin rate is usually a much more important consideration than the index rate. While the index rate will vary according to market circumstances, the margin rate should remain the same throughout the life of your loan.

However, this will depend in part on the terms offered by each individual lender. Look for lenders offering a low margin that's not subject to change throughout the life of the loan. 

Plan for the future

Homeowners will get the best deal on a mortgage when they make plans for the future and stick to these plans.

For example, getting an adjustable rate mortgage on a home that you'll only be living in for a short period of time is financially favorable. Adjustable rate mortgages usually feature a low introductory rate. Known as a "teaser rate", this mortgage rate offers exceptional savings if a homeowner is looking to live in a home for a short period of time and then sell and pay off the loan before the rate increases.  

Understand rate caps

Adjustable rate mortgages vary in interest rate over the life of the mortgage, but they are generally subject to rate increase caps. These caps limit how high a rate can increase over a given period of time. 

Interest rate increase caps are generally classified as either periodic or lifetime. A periodic cap will limit an interest rate rise by a certain percentage rate over a designated period while a lifetime cap limits interest rate rises over the entire life of the loan.

A lifetime cap can provide you with a guarantee that your mortgage interest rate will never exceed a certain percentage rate. However, a periodic cap may prove more effective at keeping down your rates if it is lower than a proposed lifetime cap and if rates don't continue to rise over consecutive periods. Be sure to check out mortgage rates in your area.