5 Year Adjustable Rate Mortgage
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Adjustable rate mortgage loans involve a changing interest rate periodically based upon the criteria set forth in the contract. Normally variable interest continues to climb each time it changes. This is often done to allow the buyer to start off with lower interest and a lower monthly payment. Buyers are often unhappy when their payment periodically increases and often seek to refinance with a fixed rate because a rising payment may be difficult to make. A 5 year adjustable rate mortgage loan is done to ensure the lender obtains a steady amount of funding. Other types of loans include graduated payments, interest only, fixed rate, negative amortization, and balloon payment. Buying a home can be very stressful but when a person places his or her trust in the Lord, He will give peace and will help in making the difficult decisions. "Thou wilt keep him in perfect peace, whose mind is stayed on Thee: because he trusteth in thee" (Isaiah 26:3).
Each type of loan has basic features associated with it. Adjustable rate mortgage loans have beginning interest for a certain period of time. The amount of the interest resets according to the schedule set forth in the contract. Limits are usually set on how much the interest can increase each time and the time period set for the changes is also limited. Some contracts allow for the adjustable rate mortgage (ARM) to be converted to a fixed option at certain times. However, prepayment penalties may apply when an ARM is paid off early and may be a significant amount. Prepayment penalties are usually based upon a percentage of the total loan amount.
A graduated payment mortgage (GPM) has low monthly payments that gradually increase over time. People who usually decide on a GPM are ones that have a good idea that their income will increase as the payments do. Young people are often very confident that the outcome with a GPM is going to be positive but buyers may overestimate their individual earning potential and find themselves in a difficult situation in the future. A 5 year adjustable rate mortgage is similar to a GPM only the adjustments on the interest occur over a 5 year period and they are usually based upon the federal prime rate so they can vary more dramatically in comparison.
Interest only loans allow the buyer to pay only the interest for a certain amount of time so the principal balance remains the same. This allows the buyer to have very low monthly payments during this time. Adjustable rate mortgage loans do not have high interest in the beginning compared with an interest only loan. Lenders see interest only as a higher risk because buyers become discouraged from not building any equity in their home so they may find that refinancing is difficult. The benefit of an interest only option would be that the buyer can save the cash saved from having to pay on the principal and use it for other investments.
A fixed interest option means that interest stays the same over the life of the contract. The monthly payment is configured using the amount of interest and the length of the contract to come to a fixed payment amount each month that eventually ends in zero with the last payment made. Terms can begin at 15 years but the average time period for the contract is a 30 year option. A person may have an option of a shorter term or a longer term period. Fixed interest options are usually more expensive in the long run compared with a 5 year adjustable rate mortgage. Many people prefer having a fixed monthly payment so they know what to expect to have to pay each month. Fixed rate options do not usually have a prepay penalty associated with them.
Negative amortization usually occurs in loans where the payment amount is not enough to cover the interest. The unpaid accrued interest is added to the outstanding principal balance so that the balance increases by the amount of the interest each month. Adjustable rate mortgage loans may have a negative amortization for a certain period of time. One of the negative aspects of negative amortization options is that the payments can vary dramatically from one month to the next. Eventually the buyer will have to make full repayment according to the original agreement of the contract.
A balloon payment mortgage has a large payment due at the end of the loan period. The difference between a balloon payment option and a 5 year adjustable rate mortgage is that refinancing may be required at the end of the contract or period because the buyer can not make the payment. A balloon payment mortgage is used more for commercial real estate than for residential real estate. Many buyers use a balloon payment option because they plan on refinancing or selling their property before the large payment is due.
Variable interest mortgages are the most popular for homebuyers who know they are going to be moving within several years. These usually offer a lower fixed rate of interest for the first several years and then after that the interest will fluctuate affecting the amount of the payment. The longest amount of time that a variable interest option can be written is for ten years. These types of options are great for people who have jobs where they move often.
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