Avoid Adjustable Rate Mortgages

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Now is a good time to start thinking about fixed rate mortgages. Even though they have a higher upfront interest rate, they will be a bargin in five years or less.

As the summer sets in, real estate shopping will begin in earnest. With mortgage rates creeping up many pundits are predicting a softer housing market this summer, in contrast to the strong summers of the past four years. March mortgage data is already proving some of them wrong, setting new record for March lending. For those of you who plan to start your home shopping this summer, here are a few things to think about when looking for a mortgage.

Don’t Get Caught Off Guard by Rate Hikes

With just about everyone predicting mortgage rate hikes over the next few years, locking in a fixed rate now is a good idea. Remember, mortgage rates are still near their all time lows. There is very little room for mortgages to go lower, while the upside potential is staggering.

Many consumers get lulled in by the fact that Adjustable Rate Mortgages can be 0.5% to 1% lower than most fixed rate mortgages. This spread is designed to bait consumers into taking on a riskier adjustable rate position. This position is better for the banks, which are experiencing extremely tight margins right now because of the low long term rates.

Consumers should also consider the future. Getting a fixed rate now ensures that your monthly payment stays the same (assuming property taxes don’t increase dramatically). If you can make the payment now, you don’t have to worry about any surprises in the future. Adjustable Rate Mortgages have a nasty habit of resetting at the most inopportune times.

For some, a sudden 1% to 2% increase in their mortgage payment can mean default or chronic late payments. Given the opportunity to go back in time, many consumers who chose adjustable rate mortgages five years ago would certainly change their mind now. This is one of the reasons default rates tend to go up, as interest rates increase. Many consumers are shocked by the $200+ increases in their monthly mortgage payments.

Avoid Exotic Financing

Many exotic financing vehicles have an adjustable rate to them. These vehicles are typically packed with surprise rate changes. With the current turmoil in the mortgage industry, these loans will also be harder to obtain. This means they will be more expensive and may even have valuable points attached to them. Points require a borrower to pay a certain percentage (point) of the loan in an upfront fee.

These loans also tend to be interest heavy; meaning a small change in the interest rate of the loan could mean significantly higher payments. Before signing anything, have a very good understanding of what you will be paying monthly and what could happen to change that. Don’t just take someone’s word that your rate should not change often; look into how often the rate can change and what index the rate is attached to. This can help you decide if this is truly the right financing vehicle for you.

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