Home ownership is still the American dream. Today, obtaining a mortgage to purchase a home has gotten to be a lot more difficult. Questions arise as to which type of mortgage is the better route for a prospective homeowner to take. The adjustable rate mortgage or the fixed rate mortgage?
Adjustable rate mortgages are riskier than fixed rate mortgages. An adjustable rate mortgage allows you to go into the mortgage with a lower interest rate for a period of time. The risk is that the interest rate, over time, will go up and become unaffordable. The most common type of adjustable rate mortgage has a fixed interest rate for the first 5 years. However, every year after the first five years, the rate changes on an annual basis. The interest rate is governed by the Federal Reserve Boards “Consumer Handbook on Adjustable Rate Mortgages.” When obtaining an adjustable rate mortgage, the prospective homeowner takes the risk as to whether interest rates will increase over time. If this happens, the monthly mortgage payments may increase to a level that the homeowner will become unable to make the monthly mortgage payments.
Adjustable Rate Mortgages Start With Lower Payments
The adjustable rate mortgage gives the homeowner a lower interest rate in the beginning which allows the homeowner to have additional funds to pay off debt and to accumulate some savings as a cushion. There are caps which are utilized by financial institutions regarding adjustable rate mortgages. These caps usually allow the mortgage to go up no more than 2% per year and 5% over the entire period of the loan.
When Do Adjustable Rate Mortgages Make Sense?
An adjustable rate mortgage makes sense if you are planning on holding your home only for a short period of time. If you are planning on holding your home 5 years or less, the adjustable rate mortgage would be a better deal. If you plan on holding your home for a longer period of time, the fixed rate mortgage is most likely the more conservative way to go and involves a lot less risk. Unfortunately, many homeowners presume they are going to move, relocate, sell and buy, within the five year period and then their plans change. At that point they are stuck with an adjustable rate mortgage unless they refinance all over again.
Fixed Rate Mortgages
A fixed rate mortgage is a mortgage that has a payment that remains the same over the entire period of the loan. These mortgages are usually for terms of either 15 or 30 years. Approximately 75 to 80% of the homeowners who take out mortgages, take fixed rate mortgages on their homes. It gives the homeowners the security of knowing what their mortgages rates will be over long periods of time. It allows them to make plans for the future and gives them the security of not facing higher mortgage payments down the road. Families who have fixed rate mortgages are usually looking to avoid the long term risks of losing their homes in foreclosure proceedings.
Elliot Schlissel is a foreclosure defense attorney representing homeowners throughout the Metropolitan New York area.
