Variable-Rate Mortgages: Part 1
We have already looked at fixed-rate mortgages, which are divided into part
1, part 2 and part 3. Now well talk about the alternative– thevariable-rate mortgage.
As we mentioned before, when people speak about mortgages they usually mean
fixed-rate mortgages. It is the traditional loan type, which exists for a long period of
time. The variable-rate mortgage is newer and requires much more attention if you
want to handle it.
So what exactly is a variable-rate mortgage? It is a mortgage type where
interest rate change is possible. When such a change occurs it means that the monthly
mortgage payment will change accordingly.
The variable-rate mortgage is also commonly referred to as an adjustable-rate
mortgage or a floating-rate mortgage.
The reason a lot of people choose the variable-rate mortgage is due to the
introductory rate, or the a teaser rate. This means that, for a set period of time, the
interest rate will be lower than the rate available with fixed-rate mortgage. Meaning
that, during this time, your payment will be lower. After this set period of time is
over, the interest rate of the variable-rate mortgage changes according to the
prevailing rates in the market. Here is where the problem occurs. This payment
variation is very dangerous for you if you don't take it into account. The borrower has
to be ready for the interest rate increase, or they’ll experience sticker shock. You
have to account for the possibility that prevailing rates in the market will be higher
than your introductory rate.
The variable-rate mortgage may be a good solution because the home price
value increases. In this case if you want to become a homeowner, you may be priced
out of the market if you attempt to cover the costs of anew home with a fixed-rate
We have already looked at fixed-rate mortgortgage.
Variable-Rate Mortgages: Part 2
The variable-rate mortgage is much more flexible than the fixed-rate mortgage.
This flexibility is both an advantage and disadvantage of the variable-rate mortgage
at the same time.
This flexibility enableshomebuyers to account for things such as bonus
payments, expected inheritances and economic environments where interest rates are
falling, in which case the interest rate and monthly mortgage payment can actually
decline over time. Variable-rate mortgages also provide lower monthly mortgage
payments for people who do not expect to live in ahome for more than a certain
number of years and those who expect to be able to pay off their mortgages rapidly.
But from the other side, variable-rate mortgage flexibility makes it harder for the
borrower to choose the right loan. Costs aren't easily compared, interest rates vary
significantly by lender, shifting interest rates make it difficult to predict future
payments and payment adjustments can make budgeting a challenge.
Variable-rate mortgages allow borrowers to have lower initial payments for a
longer period of time. It can last anywhere from one month to ten years. The ability
to choose such terms of the variable-rate mortgage is also what makes it so popular.
Some of these loans allow the borrower to pay only for the interest rate during a
certain time period. When the loan's principal comes due, the monthly payments
increase a lot. If the interest rate rises, the new monthly mortgage payment may be
more than double compared to the initial one.
Note that if you want to make a prepayment or you want to refinance the loan,
you may receive penalties with a variable-rate mortgage.
Variable-Rate Mortgages: Part 3
The main difference between variable-rate mortgages and the fixed-rate
mortgages is the complexity of the first one. It is because of this complexity that the
variable-rate mortgages have more flexibility.
There is some terminology with which a borrower should be familiar. A
sampling of critical terms includes: adjustment frequency, which refers to the
frequency of time between interest rate adjustments, adjustment indexes, which help
borrowers gauge the amount of expected interest rate change, margin, which help
borrowers understand the relationship between their loan rates and the underlying
benchmarks used to set these rates, caps, which limit the amount by which the rate
can rise with each adjustment, and ceiling, which refers to the maximum interest rate
after all increases. You have to receive knowledge about mortgages if you want to
successfully borrow. This knowledge will help you to feel comfortable with the
variable-rate mortgage. It will also help you to avoid mistakes that may cause a lot of
The variable-rate mortgage is the right choice for people who are counting on
the fall of interest rates, who are sure that they will be able to pay off their mortgages
before the interest rate adjustment period is reached, or who only plan to live in a
particular home for a limited number of years.
If you are going to take a variable-rate mortgage, think about it carefully. If
you aren’t sure you will be able to handle it, it is better for you to refuse this loan
type. Remember, while the variable-rate mortgage is more complex than the fixed-
rate mortgage, if you will choose the former you will be able to receive significant
In order to become homeowner the fixed-rate mortgage and variable-rate
mortgage are both good; you just have to come to the decision about which of these
loans suit you the most, and for this you have to do your research. Knowledge is
power and make sure to use it properly.
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