Adjustable Versus Fixed Rate Mortgages

Adjustable rate mortgages are generally a bad idea. They are usually promoted by a low interest rate such as 2-3% which is locked in for 3 years. This seems great at first. Your monthly payment is lowered.

Your payment is lowered significantly during this time because your payment then becomes only/mostly the interest on your mortgage. At 2-3% thats a very low payment. Very little if any of that payment goes toward your principle. This means that once your 3 year agreement is over, you still have the same amount of financing as you started with, and that is when they jack up the interest rates.

Once the 3 year term agreement is fulfilled, you are basically at the whim of the finance company. The adjustable rate sky rockets, doubling or even tripling the payment you have had for the previous 3 years, and the increase is almost all interest (most of it dose NOT go toward the principle). The rate then also fluctuates. One month it might be 12% and the next it might be 14%(or more). This makes your payment fluctuate as well.

An adjustable rate mortgage is a trap. It’s basically a refinancing, that traps you into refinancing again once your adjustable rate comes into effect. This guarantees that you will not gain equity in your home, you will be constantly scraping for your payments, and you will have to front the cost for the refinancing yet again. In more extreme cases its a trap to sell your home or can even lead to foreclosure (if you don’t make your payments). Either way the company makes the money and gains the asset, NOT YOU. As I like to say, It is a perfectly legal SCAM!

You are better of taking a fixed rate mortgage that keeps you at a constant 5%-8%. Whatever you lock in at is where it will stay for the duration of your mortgage. This will keep your payments the same, from month to month, depending on whether or not you have an escrow account (which can cause fluctuations based on property tax increases/decreases.)

I am a regular person, with real experience as a homeowner. Thus, I have tried to explain adjustable rate mortgages in regular terms, so that regular people like me can understand it without all the legal jargon.