Finding a Place for an Adjustable-Rate Mortgage

Richard Barrington
LoanBiz Columnist

Article Rating , 4 out of 5 based on 1 votes

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.

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