[Are
adjustable rate mortgages a blessing or a time-bomb?]
Adjustable rate mortgages were developed in 1980s as a loan product in
which the rates were tied in to a variable index, such as the US
treasury bills. When lenders offer loans at 2 to 3 percent higher than
the rate of the index, the additional percentages constitute the margins
of the lenders. This was in response to the large hikes in interest
rates of conventional loans at the time, which hurt the property
ownership market.
Adjustable rate
mortgage facts you should know
Just
like how its name describes, the rates of these mortgages are adjusted
within a stipulated time period ranging from every 6 months every 3
years, to coherently with the fluctuation of the index in which it is
tacked to. Usually, interest rates are set at 2 to 3 percentages below
the current fixed rate mortgages at the beginning of the loan period.
This makes this type of variable rate loan suited for short term
property investment periods where the borrower can take advantage of
lower interest rates as compared to fixed rate loans. The drawback for
this is that repayment amounts are not consistent throughout the entire
loan period due to the adjustments of the interest rates.
With
a loan structure that has interest rates that are changeable, the
borrower will have to plan for a longer term in the event that interest
rates keep rising in the long run. Therefore, this would be a good plan
for those who expect their income to keep rising. Also, as the initial
interest rates are lower at the time when the loan is being evaluated,
this results in lower initial repayments required from the borrower and
the as a consequence the opportunity to obtain larger loan amounts.
In
conclusion, as adjustable rate mortgages can be unpredictable as the
rise and fall of economic indices, it is up to the borrower to evaluate
his or her own circumstances and make the selection on a program that
best fits personal needs and plans.
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