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Adjustable rate mortgages
A while back, I was reading about the supposed housing bubble when something caught my eye: if interest rates start to go up significantly, people with variable rate mortgages might be in trouble, as their mortgage payments would increase.
I thought to myself: with interest rates as low as they have been the last couple of years, who has a variable rate mortgage? As I understand it, when interest rates are low, you should get a fixed rate mortgage, so you can lock in a low interest rate for the long term. If interest rates rise, you've got a good deal. Conversely, the only time you should get a variable rate mortgage is when rates are high. You wouldn't want to lock yourself into a high rate (with a high fixed rate mortgage) if interest rates start to fall.
So, I did a little research. It seems that a lot of people are getting fixed rate mortgages in order to get VERY low payments at least for a few years. As this article explains, many mortgages offer a very low fixed rate for five years, then they go variable after that.
Who would want such a loan? Someone who has a shorter-term view than I have. Apparently, lenders are using these types of loans to help people buy more expensive homes than they could necessarily afford with a fixed-rate mortgage.
When considering such a loan, the article says you should ask the following questions:
- What is the interest rate caps on the loan?
- How much can the rate rise when it adjusts the first time?
- How much could it rise over the life of the loan?
- How much would your monthly payments be at the highest rate?
If you don't think your income will increase or if you think you'll be in your home for longer than 15 years, you may not be a great candidate for these types of loans.
I just wonder how many people really think too much about whether they can afford such a loan in the longer term. If they don't, then they are the people who might get into trouble when mortgage rates rise.
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