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What is a Fixed-To-Adjustable Rate Mortgage?
This type of mortgage offers fixed payments for an initial loan period of up to10 years then followed by an adjustable interest rate for the remaining term of your mortgage. Payments are usually lower than most fixed rate mortgages.
Why should you consider a Fixed-To-Adjustable rate mortgage?
If you plan to live in your home less than 10 years, you can then consider this type of mortgage. You can even customize your rate and payments by selecting the fixed rate mortgage that match how long you plan to live in your home.
What are the benefits of a Fixed-To-Adjustable rate mortgage?
You can choose a mortgage depending on the amount of time you are going to you remain in your home.
You can choose an initial fixed rate loan--whether it would be 3, 5, 7 or 10 years. You can enjoy the security of paying a fixed rates for the initial loan. The mortgage rate will then become adjustable after your timeframe with a lifetime rate cap if the interest rate increases after the initial fixed rate. Your monthly payments will probably increase.
You potentially pay a lower interest rate with the initial fixed rate loan then you would get with the traditional 30 year fixed rate mortgage.
You can benefit from rates on this type of mortgage based on the London Interbank Offered Rates Index, which is typically lower than the average fixed rate.
Large loan amounts are usually available.
Secure your interest rate with this locked in rate.
Simultaneously, you can establish a home equity line of credit.
You can take advantage of available payment options. You can make interest only or fully amortized payments during the initial loan. Then after the initial interest only period, your monthly payments will increase because it was based on a fully amortized repayment schedule of principal and interest.
You can prepay principal at any time without a penalty. If the principal payments are made during the interest only, your payments will then be recalculated monthly based on this new lower principal balance. There is usually no fee for the service.
The lifetime cap is based on the loan amount and the initial fixed rate term that you selected.
The periodic rate is based on the adjustable period for the remaining term of your home mortgage loan you selected.
You really need to sit down with your mortgage broker and figure out if this type of payment option is right for you. Are you only planning on staying up to 10 years in your new home? If not, the interest rates can be very high depending on the economy, and you may not be able to afford your monthly home payments with the adjustable rate mortgage.
Copyright 2005 Fern Kuhn, RN
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