Variable rate mortgages are considered by many home buyers due to the lower monthly payments at the beginning. The interest rate can be below fixed rate mortgages, but this is not always true. Home buyers should understand how these mortgages work and how they compare to fixed rate alternatives. This article offers details on variable rate mortgages in PA.
Details On Variable Rate Mortgages In PA
Interest Rates and Time Lines
Variable rate mortgages start at a lower interest rate for a designated period of time and then adjust at certain times afterwards. For example, a 5-1 ARM can offer a fixed rate for the first 5 years and alter every 1 year after. The fixed rate period and the intervals at which it will fluctuate are different for every mortgage. It is also possible that a short fixed period of time may have a lower initial rate than a long one.
Adjustment Basis
Interest rates on variable rate mortgages are generally based on a publicly referenced index and are noted in the mortgage terms. Most rely on a national mortgage index, which reflects lending patterns in the country. The interest rate could either rise or fall based on that index and a certain margin on top of it (as referenced in the financing terms). Indexes continually change, therefore future interest rates remain unknown until the actual adjustment date arrives.
Rate Increases
Most mortgages reference a rate cap. Rate caps limit how much the interest rate on a mortgage can rise at a given time. There may be a rate cap for every adjustment interval and for the duration of the mortgage. For example, a 5-1 ARM with a 2 percent rate cap will maintain the same rate for the beginning 5 years and may increase no more than two percent each subsequent year. If there were a 6 percent lifetime cap, then it may not increase any more than 6 percent above the original rate. Rate caps protect borrowers from dramatic increases in loan payments from year to year and are essential to understand.
Advantages and Disadvantages of Variable Rate Mortgages
Variable rate mortgages offer lower payments in the first few years and may make home ownership affordable to more individuals (or allow them to purchase a more expensive property). When interest rates are high, the difference between fixed and variable rate mortgages may be considerable, making them even more appealing. However, it is also high risk due to the potential increase over time. Home buyers expecting to own a home for many years can be better off selecting a fixed rate. This blog contains details on variable rate mortgages in PA and is meant only as a reference. Always consult a loan officer for details on individual mortgage programs you should consider and the differences between them.