The Scoop on Adjustable Rate and Interest Only Mortgages

Posted on February 08 By MLP Blog

There are so many types of mortgage programs available to home buyers that it can get difficult to keep them all separate. One of the latest types of programs that many people are taking advantage of is the Interest Only Mortgage option. An interest only mortgage is just as it sounds, you are only required to pay for the interest that is constantly accruing on your loan. As opposed to a typical mortgage you make both interest and principal payments.

The lower payment that you will see when only needing to pay the interest on your loan is great, but there are a few tradeoffs. First, as was previously stated, you are only making interest payments. This means that your monthly payments will not build actual home equity.

People who use interest only mortgage options typically have the option to make extra payments each month which will go towards their principal balance, however, most find that they never do. If you are thinking of taking on an interest only mortgage loan, mandate that you make extra payments every month or two. If you want to really build equity in your home, this is a must.

Many brokers will offer discounted rates for an interest only mortgage loan. Be sure to check with the broker you are working with to find out what they can offer you. Interest only mortgage loans remain interest only for a set number of years. So, don’t forget that when that time runs out, you will start making interest and principal payments. Only now you have far less time in which to pay off the same amount that you started with.

Prepayment Penalties on Adjustable Rate Mortgages

An adjustable rate mortgage is a great way to get a very low rate, fixed, for the beginning of your life as a homeowner. These are especially great when you can refinance before your rate begins to adjust heavily. When you are looking at an adjustable rate mortgage, be sure to ask about the “prepayment” penalty that is associated with it.

A prepayment penalty usually prevents a homeowner from selling or refinancing their adjustable rate mortgage before it is too late. These prepayment penalties typically equal between 1 and 5 percent of your principle balance if you sell or refinance too early. Many people assume these clauses due to the fact that you can often get a reduced rate for such a penalty clause. In an adjustable rate mortgage, because of the potential for high adjustments, it is extra important to avoid a restrictive prepayment penalty.

Adjustable Mortgages – Risk vs. Reward

Many people today are keeping their mortgage payments lower by getting adjustable rate mortgages. Adjustable mortgages are often fixed at a very low interest rate for anywhere from 6 months to 5 years. These very low rates can keep your payments low for a while, but what will happen once they begin to adjust? This is where the risk comes in.

Nobody knows how mortgages will be affected by future interest rate changes. If you are in an adjustable rate mortgage, you should keep your eyes peeled for changes to the interest rates. If you see a pattern of rate changes that may be bad for your adjustable mortgage, think about getting the loan refinanced before it begins to adjust.

The risks involved in adjustable mortgages can be high if you are not prepared. However, if you are prepared to quickly get your loan refinanced before it begins to adjust, you can move it into a fixed rate or into a longer adjustable period. Either way, don’t let your mortgages adjust to the point where you are paying a high premium just to have a roof over your head.

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