What is an Advantage of an Adjustable Rate Mortgage Quizlet
What is an adjustable rate mortgage? What is its biggest advantage? It can vary significantly from year to year, but it is not a risky mortgage product. You should also make extra payments to build equity. Listed below are some of its main advantages. Take our quizlet to learn more! It will make you a better mortgage decision! We hope this information was useful. Good luck! Here are the advantages of an adjustable rate mortgage:
Low initial interest rate
An adjustable-rate mortgage is a type of loan with an adjustable interest rate. The first rate may be lower than the fully indexed accrual rate, and it may be increased a certain number of times after the initial period. Generally, this type of mortgage is more flexible because it allows borrowers to amortize their loan at a negative interest rate. In addition, these mortgages are regulated by several agencies.
Lower initial interest rate
An adjustable-rate mortgage, also known as an ARM, has an introductory interest rate that is set at two percent for a year. Over the life of the loan, this rate may increase by two percentage points. The lender takes a margin of 2% and a 2% index into account when setting the initial rate, and this margin cannot increase more than two percentage points. The resulting fully-indexed interest rate cannot exceed six percent, and the loan is considered “underwater.”
While the interest rate of an adjustable rate mortgage will fluctuate with the economy, it is still advantageous to purchase a home with this type of mortgage. Not only will you have the opportunity to save on interest, but you’ll also be able to enjoy the lower finance costs that come with the variable payment plan. While a low initial interest rate is encouraging, it’s important to remember that lenders are competing for business and are willing to offer a lower interest rate. If you decide to take out this type of loan, make sure to check whether the lower rate is really a discount or deferred interest.
Limitation on interest rate change
A limit on the interest rate change on an adjustable rate mortgage is a loan feature that allows you to lock in a set interest-rate for a certain period of time. This helps prevent large fluctuations in payments and is particularly useful if you anticipate that your interest rate will go up. As long as the loan’s interest rate cap is high enough to prevent a large increase in your payment, this feature is a great choice.
Regulated by government agencies
Consumers should be aware of the ramifications of an adjustable rate mortgage. These loans can be sold to consumers who cannot afford to pay the rising interest rates. The Consumer Federation of America has designated these cases as predatory loans. There are several ways to prevent your loan from becoming one of these cases. One of the most common protections is a fixed-rate initial period, which gives you time to increase your income. Another way is to have a lifetime cap on interest rates.
Another benefit to an adjustable rate mortgage is that it allows you to make principal payments early without incurring a penalty. While this shortens the total loan amount, it doesn’t shorten the period of the loan. The remaining principal amount is then adjusted to a fully-indexed interest rate. You can also prepay the old mortgage, which counts as an early payment. While an adjustable rate mortgage may seem risky, this risk isn’t something that should be taken lightly.
A single-year ARM may increase by as much as one percentage point each year, but three-year ARMs are limited to two percent. A five-year ARM can be up to six percent in the first year, which is still a small increase. Depending on the type of adjustable rate mortgage you have, your rate may increase more than six percentage points. These changes aren’t enough to keep a mortgage up to date.
The most common mistake borrowers make when applying for an ARM loan is ignoring the interest rate cap. In fact, twenty to twenty percent of ARM loans contained errors called Interest Rate Errors. The former federal mortgage banking auditor estimated that these errors led to $10 billion in net overcharges. Other mistakes were incorrectly chosen index dates, margins, and interest rate change caps. The mistakes were identified through a non-profit mortgage auditing firm, Consumer Loan Advocates.
When comparing ARMs, the interest rate is calculated by referencing the benchmark interest rate at the time of loan origination. The benchmark rate is a certificate of deposit or a Secured Overnight Financing Rate. The new interest rate is the benchmark rate plus a margin. So, if the benchmark rate is five percent, then your new interest rate will be six percent. The parties will usually agree on the maximum interest rate increase during the life of the loan. Many borrowers opt for ARMs because they charge less than fixed-rate mortgages.
