Sometimes it seems that everywhere you look right now, you see ads for home loans with incredibly low rates. It's hard not to ask - are these ads for real?
The answer is - yes, these ads are real, and they're for adjustable-rate mortgages. Generally, though, the special offer being advertised is only for a short period of time. After that, the loan reverts to the standard interest rate. So once your low interest period ends, you can almost guarantee that your loan rate will rise. Depending on the way your loan is structured, that will more than likely mean a rise in your repayment, too.
While it may be nice to have a period of time where you loan repayment is low, the reality is that at the end of the low rate period it's going to rise, perhaps substantially, and you have no way of knowing in advance exactly what your new repayment is going to be. While many people are able to cope with this level of uncertainty, for others it can be very worrying, as their incomes are limited. It's often good to start making monthly repayments equivalent to what you'd be paying under the standard interest rate, even if you're still in the low rate period of your adjustable-rate mortgage. Paying more can get you into the habit, so you can budget accordingly, and it means you can pay a lot more off the loan early and save yourselves a lot over the life of the loan.
In some instances, lenders have already realized that the uncertainty of adjustable-rate mortgages can be a problem for some families. As a result, some lenders include a clause that limits the size of any interest rate increase, so at least your possible future payment will be capped. But again, this capped period is only going to be for a set period, say 5 years. At some point, you're going to have to pay the full rate.
Basically, whether or not you choose and adjustable-rate mortgage comes down to your personal financial situation. If you know you can comfortably make the initially payments, and can still make payments even after a substantial rate increase, say 2%, then an adjustable-rate mortgage is probably the best way to go. If, however, your income is fixed and the mortgage payment, though affordable, would become a real problem after a substantial rate rise, then a fixed rate or interest only loan is probably a better option.
Adjustable-rate mortgages usually have a lower interest rate than most fixed rate loans. So they can be more affordable initially. This may also mean that you can qualify for a larger loan. Also, some lenders will consider extending the period of a loan if rates rise substantially and you find yourself in difficulties. So your 20 year mortgage may become 22 years. Of course, this is only likely to happen if you're up to date with your payments.
Analysis of bank rates over an extended period of time has shown that adjustable-rate mortgages are also a lot more likely to be cheaper than fixed rate loans most of the time. So what you sacrifice in payment certainty, you gain in cheaper rates - most of the time.
So before applying for an adjustable-rate mortgage, take some time to think about the following questions. Knowing the answers will make it much easier to decide if an adjustable-rate mortgage is right for you.
- Is it likely that my income will rise in the foreseeable future? Or will my partner soon be returning to paid work?
- Am I likely to need to borrow other substantial sums shortly, for example to purchase a car or for school tuition?
- Do I expect to sell this home in a short period of time?
Once you have the answers, talk to a lender or a mortgage broker about your situation, and they can help you decide if an adjustable-rate mortgage is right for you.
There's lots more helpful home loan and adjustable-rate mortgage information at Home Loan Zone Central
