Adjustable rate mortgages can seem very attractive when they start as low as 5.5 percent. But, study the macro-economic environment and your mortgage terms carefully before you close the deal. Something termed as a cap in your mortgage terms and conditions can lead to a huge change in your interest rate over the loan tenure. The cap defines the maximum amount of interest loan fluctuation that your loan can undergo in a given period.
If your ARM has an annual cap of two points, you could actually end up paying 7.5 percent before the year is out, if short term rates move up. If the lifetime cap is six points, then the interest rate could move up to over 11 percent.
The number of years that you plan to own and live in the particular mortgage is another thing that you need to factor in while considering the above. If you have a short timeframe of one or two years in mind, an ARM may be a good bet as you will benefit if the rates begin to fall. However, you must bear in mind that if you change your mind and decide to continue in the property, and if the interest rates go up, you stand to loose substantial equity in your home.
Given today’s market scenario, you must evaluate all factors very closely, before deciding on which mortgage you go in for.
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