Your First Time Home Mortgage

Adjustable Rate Mortgages come with interest rates that are altered periodically. These alterations could be made monthly, yearly, … even every 5 years.

Every time an alteration is made, your monthly payments change.

The good thing about adjustable rate mortgages is they usually come with significantly low interest rates meaning low payments for you.

The not so good thing is, these low interest rates are for a limited time only. Thereafter, your payments jump up, and then keep dancing about.

There are ways to bring some sanity to this chaos. Such as:

* In-built limits know as ‘Caps’

With most adjustable rate mortgages, interest rates cannot increase or decrease indefinitely. Your loan agreement would clearly state the maximum amount that your rates - and therefore your payments - can go up to. And drop down to. So, although your mortgage payments would fluctuate, they would do so within a clearly defined range.

Take for example a cap of 2 percentage points . This would mean that when your mortgage is adjusted, your rate cannot rise or fall by more than 2 percentage points. So if your mortgage was at 5%, the most it could get to would be 7% . This is the ‘periodic cap’. It refers to each period of adjustment.

But then, your mortgage rates can’t just keep going up by 2 percentage points every single year. There is another cap. The lifetime cap. This places a limit on how much your mortgage rate can go up to, the entire time you have the mortgage. So, say you have a lifetime cap of 5%, the interest rate on your 5% loan cannot go higher than 10%. Ever.

Ideally of course you want your interest rates to scrape the bottom level, for most of the life of the loan. That would be very nice indeed. But, given the length of most mortgages, your rates are very likely to hit the ceiling. Several times.

So, before you take out any variable mortgage, you must find out what the caps would be on that particular loan. You’ll want to work out what the maximum repayments would be when rates are at the highest cap level, and decide if you can afford that. If that maximum possible repayment figure is relatively comfortable, it’s likely that this type of mortgage would serve you well.

* Jump ship

Having determined that you can afford the maximum payment possible, you could simply plan to refinance as soon as possible after your rates adjust for the first time (or just before, if possible). Perhaps to a fixed interest mortgage?

Towards that end, here are some suggestions:

• Before you take on the home loan, double check what conditions if any would apply if you wanted to refinance. Conditions such as prepayment penalties. (Prepayment penalties are extra fees you would have to pay if you pay off the loan early by refinancing or selling your home.)
• Before you sign anything, confirm you can afford the maximum payment first. This is so you don’t run the chance of putting yourself in a desperate situation and having to rush things. This way, you can plan properly and move at the right time.
• Put the date your mortgage first adjusts into your diary.
• Get in the habit of monitoring interest rates (you’ll want to know the index your mortgage is based on, and your lender’s margin)

* Are additional payments an option?

If you make additional payments towards your mortgage principal, you could cut down the life of your mortgage and/ or the amount you pay monthly.

Checklist:

• Is this an option with the home loan you are considering?
• Do these additional payments attract a penalty?

* Convertible adjustable rate mortgages

With convertible adjustable rate mortgages, you can take advantage of the low rates and payments that come with a variable mortgage, Then … you can morph your mortgage into a more stable fixed interest mortgage.

You do have to convert within a certain period of time – you’d have to check with your lender.

The going market rate at the time of conversion is what is used to determine the interest rate of the new fixed interest mortgage. However, the conversion interest rate is often a little higher.

Checklist:

• What conditions must you comply with?
• What’s the conversion fee?
• What’s the interest rate?
• What paperwork is needed?

Other Types of Adjustable Rate Mortgages

Apart from the convertible mortgage mentioned above, you will encounter several other types of adjustable rate mortgages. They are:

• Hybrid Loans
• Interest-only Mortgages
• Payment-option Adjustable Rate Mortgages

Please click on the links to find out more.

Three important things …

Three important things to remember about Adjustable Rate Mortgages are:

1.They are time and energy intensive. They are not the set-and-go option.

2.If you take a little time to choose the right type of mortgage, put in place an action plan for the future, and watch consistently, you could make adjustable rate mortgages work superbly for you.

3. Here are some things to look for, before you sign up for any variable mortgage. Also a simple way to plan for the changes that come with a variable mortgage –> First Time Home Mortgage Checklist For Adjustable Rate Mortgages

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Tags: adjustable rate mortgages, first time home mortgage, variable mortgage