Finding a Place for an Adjustable-Rate Mortgage
Richard BarringtonLoanBiz Columnist
Much of the reported difficulty with home loans recently
has centered on adjustable rate mortgages: those mortgages with interest rates that
reset periodically according to market conditions. Even so, for sophisticated
and informed users there is still a place for adjustable rate mortgages under
certain circumstances.
Using Truth in Lending Act (TILA) information
as a starting point, borrowers can analyze whether an adjustable rate mortgage might
be the right choice for their home loan.
The Value of Teaser Rates
Teaser rates are both the charm
and the curse of adjustable-rate mortgages. Teaser rates are below-market
interest rates charged for an initial period which can range from 1 month to
several years. Lenders offer these rates to attract home loan customers. The
difficulties repaying the mortgage occur with borrowers who haven't planned for
larger payments once the teaser rate expires.
Truth in Lending Act disclosure
includes the essential terms and conditions of the mortgage, which are to be
stated clearly in writing at the origination of any loan. This Truth in Lending
Act information should include the parameters for how the adjustable-rate mortgage
will reset--when and how frequently this will happen, what the new rate will be
based upon, and whether there are any caps on how much the interest rate can
change.
Homeowners can win by taking
advantage of a teaser rate as long as they are prepared to pay the normal
market rate that will follow, and have the means to pay off or refinance the mortgage
should market rates rise unexpectedly. However, before counting on paying off the
home loan early or refinancing it, borrowers should verify that there are no
penalties for doing so. This is another piece of Truth in Lending Act information
to review.
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.
