5 Questions to Ask Before You Get an Adjustable Rate Mortgage

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Published: 06th November 2012
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If you're considering an adjustable rate mortgage, you probably already know the short-term advantages of this type of loan. But before you actually sign on the dotted line, you need to make sure you're making the right choice. To do that, ask yourself these five questions:

1. "Do I understand the difference between a fixed rate and an adjustable rate mortgage?"

A fixed rate mortgage means exactly what it sounds like -- the interest rate stays the same throughout the duration of the loan.

An adjustable rate mortgage starts out with a very low interest rate (often lower than the percentage for a fixed rate mortgage). But at certain pre-determined times, that rate goes up. In the end, the rate for this type of loan may actually be higher than a fixed rate mortgage.

2. "Can I afford it when the rates change?"

The introductory or "teaser" rates are great, but when they increase, will you still be able to afford your monthly mortgage payment? You should never agree to an adjustable-rate mortgage if you do not think you'll be able to afford it when the rates go up!

How do you know if you can? After all, you don't have a crystal ball!

Currently, the Federal Reserve lists the average interest rate for a 30-year, conventional, fixed rate mortgage at 3.55%. Let's say a lender offers you an adjustable rate mortgage that starts lower than that number (2.9%), but ends much higher (4.3%) by the end of the 30-year mortgage.

Certainly, no one can predict their financial well-being three decades in advance, and most people sell their home before paying off the 30-year loan. But, for argument's sake, ask yourself, "Can I afford the 4.3%?"

If not, don't sign on the dotted line!

3. "Can I handle the uncertainty?"

This question goes hand-in-hand with the previous one.

Knowing that your interest rate -- and, therefore, your mortgage payment -- is going to periodically increase can be stressful enough. Not knowing where the additional income to cover that increase will come from only adds to it.

Some people don't let these uncertainties bother them. They live life as it happens, and don't stress much about the future. But for others, the stress, worry, and nervousness about uncertain situations -- especially ones involving financial responsibilities -- are too much to handle.

If this sounds like you, then an adjustable rate mortgage probably isn't a right fit.

4. "How long do I plan on being in this home?"

Adjustable rate mortgages can be advantageous if your plan is to only live in the home for a few years.

Think about it this way -- if you have found a house that's a perfect "starter" home, chances are you won't be there for more than five years. Because adjustable rate mortgages start off with a very low interest rate, you might sell the house before your rate goes up!

Just be prepared to make the higher payments if the home doesn't sell immediately and sits on the market for awhile.

5. "Do I understand the fine print?"

Legally-binding paperwork -- like what you're dealing with when you sign a home loan -- can use language and wording that can be confusing to the average consumer. The papers you sign to get an adjustable rate mortgage are no exception.

Be sure you completely understand when the interest rate will increase during the loan, and by how much each time. If you have any questions, be sure to ask you lender before signing on the dotted line.

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