The Return of Adjustable-Rate Mortgage

The recent dramatic increase in mortgage interest rates have caused an alarm for the new home buyers. The rates on a standard 30-year fixed mortgage have gone from record low at below 3.5% to as much as 4.5% recently - which significantly increased the monthly payments that new home buyers will have to pay and making it harder for them to qualify for mortgage loans.

For example, at 3% fixed-mortgage interest rate, you will pay $843 per month for a $200,000 home. At 4%, the payment would be $955. However, if your current credit status only qualified you for a monthly payment of $843, then that means that you can only obtain a loan for $177,000 - preventing you to take on a home that you really want. So, getting an adjustable-rate mortgage will let you spend more on the house you want.

According to Bankrate, even though other mortgage rates have climbed dramatically, the ARM rates have remained steady between 2.7% and 3.1%. As Freddie Mac Vice President and Chief Economist Frank Nothaft said, "with the ongoing run up in fixed mortgage rates, adjustable-rate mortgages are becoming more popular among home owners looking to refinance and for home purchasers."

The disadvantage of ARMs, is that the initial low interest rate is only locked in for the first year. The interest rates will increase as it follows the prevailing market rate for the succeeding years causing your monthly payment to skyrocket Some home buyers were not able to afford the higher reset payments causing them to default on their loans. Others say that adjustable-rate mortgages are to be blamed for the housing bubble.

Here's a piece of advice, before you consider taking up an adjustable-rate mortgage, you need to understand how the future increase in mortgage could affect your future monthly payments. Look at the maximum rate provision stated on the contract - both annually and over the life of your loan. Compute all scenarios, then see if you will be able to meet your future obligations.

 If you need more information on different interest rates, don't hesitate to contact me. I will be more than happy to help.