Adjustable Rate Loan
An adjustable rate loan (ARL) or adjustable rate mortgage as it's also called is a home loan that has an interest rate that can change over time.
Basically, this means that the total amount of your payments can fluctuate from month to month. There are a number of positive things about this type of loan, and it's important that you take the time to learn as much as possible about this lending option before making a final decision.
How it Works
When you take out such loan, there will be what is known as a "teaser rate", which is essentially an interest rate that will stay the same for a certain period of time. The initial rate you have might stay the same for just one year or upwards of five years. Once this period ends, the loan will adjust to the full-indexed rate.
If you want to determine what your full-indexed rate on your loan is going to be, you will simply need to add the margin and the associated index together. You can find the most current index price on the internet without any issues.
You will want to refer to your official loan documents in order to find the margin so you can complete this calculation. It is important that you take payment caps into consideration when doing the math, as well as how often your loan adjusts itself.
You will definitely need to take the time to calculate your fully-indexed rate, just so you will know exactly how much interest you will be paying on your loan. This won't take very long at all, and it is extremely valuable information to have.
ARLs have what are known as adjustment caps, which sets a limit on just how much your rate can change over a certain period of time. There are a few different types of adjustment caps that you will want to know about before taking out this type of loan.
- Initial: This is the amount that your interest rate can change at the time of the very first adjustment.
- Periodic: This is basically how much your rate is able to change in a given period. For a 5/1 loan it would be once every year, and with a 5/6 loan it would be every six months.
- Lifetime: This is the amount that your rate can fluctuate throughout the entire span of your loan. If your loan is for 30 years, it will not be able to pass this amount at all.
These days you will find that a lot of ARLs are what as known as "hybrids" A hybrid ARL is one where the interest rate is fixed for a certain period of time, and then past that period it becomes adjustable.
If you see an advertisement for a 5/25 adjustable rate loan, this means that the total loan period is 30 years. The first five years of the loan would have a fixed rate, while the rest of it will have adjustable rate.
This means that for the last 25 years of your loan, your payments will likely fluctuate up and down instead of staying exactly the same like they did for the first five years.
Types of ARLs
There are a number of different adjustable rate loan options, and it is crucial that you take the time to see what some of them are.
The very smallest of these loans is 1 month, which means that the rate becomes adjustable after the first month.
There is also a 6-month loan, which means that the first adjustment comes after the first six months, then the rate adjusts every six months.
A 1-year loan will have the first adjustment after one year, and it adjusts on an annual basis.
A 3/1 loan will have the first adjustment after three years, and it will adjust annually.
With a 5/1 loan, the first adjustment comes after a period of five years, then adjusts each year.
These loans go all the way up to 15/15, which is where the first and only adjustment occurs after a period of 15 years.
It is important to keep in mind that there are other types of these loans available, and they are often advertised in different ways.
You will need to have a full understanding of what each loan type means so you don't end up agreeing to something that you aren't comfortable with.
A majority of people take out an adjustable rate loan/mortgage because it comes with a fairly low introductory interest rate, and therefore a lower payment. You will be able to refinance the loan you take out when the initial fixed period comes to an end.
After the initial fixed period, the rate becomes adjustable, at which time many homeowners decide to sell their home or refinance into another loan.
It is important that you make a plan with regards to what you are going to do with your home after five years so you will have everything worked out in advance.
Shopping for the right Loan
You will of course want to take an adequate amount of time to look for the right adjustable rate loan to match your specific needs and plans.
You can go online to shop for these loans in real time, and there are plenty of places on the web where you can get customized quotes.
When you take the time to do this research, you will be able to get a loan that you are truly happy with.
The Bottom Line
Overall, an adjustable rate loan can be tremendously beneficial for those who are looking to buy a house. As long as you do your research and find the right loan, you shouldn't experience any problems or headaches later on. These types of loans can potentially help you save a lot of money in interest, but the rate won't stay fixed forever.