Traps Associated With Adjustable Rate Mortgage

Many lenders offer several types of adjustable rate mortgages. Some lenders will offer you what is known as a "discounted rate". This rate because it is lower than the indexed adjustable rate mortgage based on the index and the margin, are often combined with larger start up loan fees, sometimes called points, and with higher interest rates after the original discounted rate expires. By the same token a lender can offer you a choice of loans with discounted points or a discounted fee. By paying for these points or fees to receive a lower interest rate that lower interest rate may only last until the first adjustment. So if a lender offers you a loan with a discounted rate, don't assume that means that the loan is a good one for you. You will have to keep in mind the higher payment in later years when the discount expires and the rate is adjusted. Will you be able to afford the new higher payment? None of us intend to put ourselves into a situation where we are unable to make the payments, but when buying a home it is even more important. If you are considering a discount adjustable rate mortgage, you run the risk of payment shock, prepayment penalties, or conversion fees.

Negative amortization happens when you owe more money than you borrowed. Negative amortization can happen even when you make all your required payment on time because your monthly mortgage payments are not large enough to pay all of the interest due on your mortgage. The unpaid interest is added to the principal on your mortgage, and you owe more that you originally borrowed. Making only minimum payments on a payment option mortgage or because your loan has a payment cap can be the culprit in this situation. Payment caps limit only the amount of payment increases, and not interest rate increases, payments sometimes do not cover all the interest due on your loan which is added to the principal and interest can be charged on that amount. A payment cap limits the increase in your monthly payments by deferring some of the interest to the end of the loan. Eventually you will have to pay the higher remaining loan balance at the interest rate then in effect. Your monthly payments could then increase a substantial amount. Be sure to find out if the adjustable rate mortgage you are considering will have a negative effect by causing negative amortization.

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