If you are in the process of purchasing a home, you may be wondering what type of mortgage you should get. While people typically get a fixed-rate 15 or 30-year mortgage, you also have the option to get an adjustable-rate mortgage. Here is what you need to know about the advantages and disadvantages of this type of loan.
Adjustable-Rate Mortgage Advantages
A huge benefit of getting an adjustable-rate mortgage is that there is an introductory period where there is a fixed interest rate. While the loan's interest rate will eventually change, you know that for the first few years, you'll have a low rate that is locked in. This can be a great way to save money in the short term if it works for you, such as if you plan on selling your home within the fixed rate period.
There are also many types of adjustable-rate mortgages with different introductory periods. For example, it is possible to get an adjustable-rate mortgage where you only pay interest during the introductory period. This gives you the ability to have a really low monthly payment that you wouldn't have with other loans.
While interest rates can go up when the adjustable-rate period begins, it is also possible for rates to go down. This will feel like a bit of a gamble, but you could end up getting a better deal on your mortgage by waiting for a positive change in interest rates.
Adjustable-Rate Mortgage Disadvantages
There is a bit of uncertainty when you get an adjustable-rate mortgage. If you are a risk-averse type of person, you may not like your future mortgage payment being a bit unknown at the time you lock in your mortgage. If you are on a strict monthly budget, then an adjustable-rate mortgage will not work for you.
An adjustable-rate mortgage can also be quite confusing when compared to other mortgages. While a fixed-rate mortgage has a single payment that you make for the duration of the loan, an adjustable rate has many rules that play into how much you pay.
For example, your interest rate is tied to an index, which you may not fully understand how it works. There are also caps on how much your interest rate can change per adjustment period. Some adjustable-rate mortgages also have a conversion option, which allows you to turn it into a fixed-rate mortgage without having to refinance.
For more info about mortgages, contact a local lender.