Adjustable Mortgage Rate

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What is an adjustable rate mortgage?

An adjustable rate mortgage is a mortgage that that offers a low fixed rate for a specified period of time, after which the mortgage lender adjusts the rate according to the type of adjustment agreed upon by you and the mortgage company. An adjustable rate mortgage will usually offer a rate much lower then a comparable fixed rate mortgage for an initial period of time.

After the initial period, the mortgage lender will adjust the rate based on a mortgage rate index. There are different adjustment periods depending on the mortgage company and the type of adjustable rate mortgage you are looking at, some of the most common adjustable rate mortgage plans are 1/1, 3/1, 5/1 and 7/1. What this means, for instance, say you acquire a 3/1 adjustable rate mortgage loan; This would mean that the mortgage lender offers you an initial low interest rate for the first 3 years and then will adjust the rate every 1 year based on an index.

There are pros and cons to an adjustable rate mortgage. As mentioned already, the adjustable rate mortgage usually offers an initial interest rate that is much lower then a comparable fixed rate mortgage and this will often save you a good chunk of change, depending on the plan set up by the mortgage lender. However, by going with an adjustable rate mortgage, you will often end up paying a much higher interest rate, later on down the line then you would with a fixed rate mortgage.

A good rule of thumb is to check out what the current fixed rates are before deciding on whether or not to go with an adjustable rate mortgage. You should ask the mortgage lender what the current fixed rate is, as well as what kind of index you might be looking at in the future. A reputable mortgage company will be more then happy to go over with you the current plans, rates, indexes, etc., in order to help you decide whether or not an adjustable rate mortgage is right for you.