There are several variables that determine the overall cost of your mortgage. One of the first decisions is whether to go with an adjustable rate mortgage or a fixed rate. With a fixed rate your payment won’t change over the entire life of the loan. With an adjustable rate, there is an introductory rate that is fixed for a period of time and after that time the rate floats based on an external index.
A 10-year adjustable rate mortgage has that introductory rate fixed for 10 years. This would seem like a good compromise between the fixed and adjustable types of mortgages but it shop around because it may just have the worst features of both types.
One of the biggest incentives to go with an adjustable rate is a low introductory interest percentage. With such a long fixed term, the interest rates are not usually discounted as much as on loans with a shorter fixed term.
It’s also important to look at how much your rate can increase in a given year. This limits your financial exposure in a given year. Some loans have caps of as much as 5%. That means that your interest rate could shoot up in a short period of time.
Since interest rates have been very low in the past few years, its safe to assume that your rates will go up rather than down over the long term. If you believe that you’ll want to stay in your home for a long time, it would be better to pay the extra money to get the fixed rate rather than gamble on the savings for an adjustable rate.
Along with the annual cap there is a life-of-the-loan cap. This is the maximum interest rate you can be charged on your loan. It may seem like a small detail when you’re buying your house but it is the sort of thing that can jack up the price of your loan in the long run.
Many mortgage web sites have mortgage calculators. You can play around with various scenarios and see how much a you will pay in the long run. Just watching how the payments change when as the loan variables change can give you a feel for what factors have the biggest impact. That will make you less vulnerable to sales pitches that sound good but don’t really save you money in the long run.
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