Mortgages come in many varieties and flavors. Freddie Mac, an agency that bundles and re-sells mortgages, has a web site that tracks the interest rates of the most common types of mortgages: 15 year fixed rate, 30 year fixed rate, 1 year Adjustable rate and 5 year adjustable rate. The URL for this site is: http://www.freddiemac.com.Look for the Primary Mortgage Market Survey to find rates on these types of mortgages.
One of the things you’ll notice when you look over the market survey is that the lowest rates are for the 1 year adjustable rate mortgage. The highest rates are for the 30 year fixed rate loans.
The reason for the difference is the amount of risk a lender takes on. If you share the risk with the lender they share the savings.
An adjustable rate loan is a way of sharing risk because if interest rates go up, you pay more. Of course if interest rates go down, you’ll save more. Since rates are at historic lows, it’s more likely that rates will increase rather than decrease.
1 year adjustable rate mortgages are loans where the rate is fixed for one year. After that initial period the rate will fluctuate with a given index. A 5 year adjustable rate mortgage has a fixed rate for five years.
A 5 year adjustable rate mortgage makes the most sense if you know that you’ll want to sell your home at the end of the 5 years. Your monthly payments will be less and you’ll have more equity than if you took out a fixed rate 30 year mortgage.
Where you might lose out with this type of loan is if you decide to stay put and interest rates rise. However, any adjustable rate loan will have two types of caps, the annual cap and the life-of-the-loan cap. The annual cap is the maximum amount the interest rate can go up in a year. The life-of-the-loan cap is the maximum rate that can be charged. Even if interest rates skyrocket you are protected by those caps.
There is always the option of refinancing after the initial introductory rate period. But every time you refinance, it costs extra money.
It pays to think about your long-term goals before you commit to a mortgage. You could be living with the decision for a long time.
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