Adjustable Rate Mortgage
While the majority of home owners are
your middle class citizens, there are some people that need to buy a home, but that have assets and investments
backing up their portfolio. For people like this, a very popular
mortgage program that many take advantage of is that of an adjustable rate mortgage. To understand better how an adjustable rate mortgage works, and why it would
be a viable program to use, let's go over exactly how these types of mortgages function.
An adjustable rate
mortgage can have different payment terms such as 15 years, 20 years, and even 30 years
respectively. These loans can be obtained through the purchasing
of a home, or through mortgage refinancing. On a mortgage refinance, these loans will take the existing principle balance
that you have on your home and stretch it out to the new payment term of your choosing. Unlike a fixed rate mortgage program, the adjustable rate mortgage has a
rate that is dynamic and changing. The rate can change each month
and is based on the market prime rate. This rate is set by the
government in order to combat inflation and to stimulate the economy.
Over the past few years
following the housing market crisis, the prime rate has been extremely low. This has been good for many people that get this type of mortgage as they
adjustable rate offered is much lower than that of fixed rates. The
flipside to this is that if the rates go up, you could be paying way more than you could have been paying on a
fixed rate mortgage.
So what type of
situation does this type of mortgage play well with? For people that are investment savvy, or who know that they
will only be in the home for 3-5 years, an adjustable rate mortgage is a great idea. People can save money on
interest payments over the short period of time that they are in the home instead of having to overpay on
interest. Again, this takes an investment savvy person to know how to read the markets and to take advantage of
the low rates being offered. Part of the housing crisis cause was that regular people got these types of loans
not knowing that the rate of the mortgage would eventually change over time. When rates went up after their
teaser rate, many people couldn't make their payments and loan default became common. While this program can be
abused by those looking for a bad credit mortgage, it can be used in a way that could be
beneficial to a borrower.