QI've Been Researching Whether An Adjustable Rate Mortgage Will Save Me The Most Money On My Mortgage Payments. What Do I Need To Know About Rate Adjustments And Interest Rate Caps?
AAdjustable rate mortgages (ARMs) can save you a great deal of money but only if the rates go in your favor. There are a few terms you need to be familiar with before taking out an adjustable rate mortgage. 1. Adjustment period: This is the period between rate changes (in years). The last number is the adjustment period. For instance, on a 3/1 ARM, the adjustment period is one or once a year. The first number represents the amount of time before the first rate change. In this case, it would be three years. 2. Interest rate cap: This is a cap that is placed on your interest rate that keeps it from increasing above a certain percentage. There are two types of caps - periodic and lifetime. A periodic cap is the maximum your rate can increase during one adjustment period (typically one year). The lifetime cap is the maximum your rate can increase over the life of the loan. One of the most important calculations for you is what your payment will be if your loan hits the lifetime cap. Can you still afford your payments if this happens? Many times ARMs are very attractive in the beginning of the loan when rates are low but as rates begin to increase, the owner of this type of loan can quickly find himself in trouble. Another factor to consider is how long you plan to stay in your home. If you only plan to own your home for five years, taking advantage of a 5/1 ARM could save you thousands. If your plans come to fruition, you will have sold the house before the first rate change and enjoyed a low interest rate during your home ownership.