Variable rate mortgages are used by many borrowers because of the lower monthly payments in the first years of the loan. The rate can be much lower than the fixed rates available at that time, but this is not always true. Buyers should examine the terms of these mortgages and how they differ from other options. This article offers an overview of variable rate mortgages in Florida.
An Overview Of Variable Rate Mortgages In Florida
Interest Rate Changes and Time Frames
Variable rate mortgages start at a lower interest rate for a designated time frame and can adjust at certain times afterwards. For example, a 5-1 ARM may stay at the same rate for the beginning five years and change every year thereafter. The fixed rate period and the intervals at which it will change differ for each loan. It is also common that a shorter fixed period of time may offer a better starting rate than a long one.
Adjustment Basis
Interest rates on variable rate mortgages are normally determined by a publicly referenced index and are noted in the loan terms. Most refer to a US mortgage index, which is based on lending expenses throughout the country. The interest rate could either go up or down depending on that index and a set margin above it (as noted in the mortgage terms). Indexes continually fluctuate, so future interest rates will be a mystery until the specific adjustment time arrives.
Rate Increases
Most loans mention a rate cap. Rate caps restrict how much the interest rate on a mortgage may rise. There may be a rate cap for each adjustment interval and for the life of the the mortgage. For example, a 5-1 ARM with a two percent cap will maintain a fixed rate for the first 5 years and may only increase by two percent every year after. If there is a six percent lifetime cap, then it can never increase any more than 6 percent above the starting rate. Rate caps protect borrowers from dramatic increases in loan payments from year to year and are important to understand.
Pros and Cons of Variable Rate Mortgages
Variable rate mortgages offer lower payments in the first few years and can make home buying affordable to more individuals (or enable them to buy a more expensive home). When interest rates are high, the gap between fixed and variable rate mortgages can be significant, making them even more desirable. However, there are also risks because of the potential increase over time. Buyers expecting to own a home for many years could be better suited getting a fixed rate. The above included an overview of variable rate mortgages in Florida and is meant only as a reference. Speak with a mortgage professional for information on individual mortgage alternatives you should consider and the differences between them.
