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Pros and cons of adjustable rate mortgages

On Behalf of | Oct 10, 2022 | Real Estate

Many Rhode Island residents are currently feeling the sting of higher prices. Whether you make small purchases like fueling up your automobile or something much bigger like buying a home, rising prices are hard to escape. However, certain home buyers are opting for a breather from expensive mortgage rates by signing up for adjustable-rate mortgages.

What is an adjustable-rate mortgage?

Sometimes called a variable-rate mortgage, an adjustable-rate mortgage is a type of home loan. Under this arrangement, the borrower’s interest rate adjusts over time based on market and financial conditions.

Saving money in the short-term

In the world of real estate, it’s not always easy for first-time buyers to have an easy time purchasing a home. Therefore, it’s often tempting for these buyers to choose an adjustable-rate mortgage due to its lower initial payments compared to a fixed-rate mortgage. An adjustable-rate mortgage can also benefit buyers not planning to spend many years inside their homes.

Accepting long-term risk

While adjustable-rate mortgages can help buyers initially save money, that’s not always the case. Having an adjustable-rate mortgage can be beneficial when interest rates are low. If housing conditions worsen, adjustable-rate mortgages ramp up the monthly price that homeowners must pay. When interest rates rise, someone paying an adjustable-rate mortgage could even wind up spending much more than if they had a fixed-rate mortgage.

As our nation raises interest rates to fight inflation, adjustable-rate mortgages can be tempting to home buyers. Before you sign an adjustable-rate mortgage contract, closely look over the margin on your loan and current interest rates among lenders. The last thing you want is to move into a new home that you’re unable to afford.