Many homeowners who are just starting out sign up for an adjustable rate mortgage to help finance their "dream house." Adjustable-rate mortgages are terrific because they allow individuals to afford homes that they would otherwise be unable to buy.
But there are some major disadvantages with adjustable rate mortgages.
When interest rates are high (and they often are), it becomes harder to chip away at the principal, because monthly payments only address the compounding interest. So not only does the borrower make payments over a longer period of time, but she also ends up paying a lot more money due to higher interest rates.
Applying for a Fixed Rate Mortgage
The solution is to apply for a fixed rate mortgage. As the name implies, the interest rates don't fluctuate during the lifetime of the mortgage. Quite obviously, it's most beneficial to refinance mortgages when interest rates are low to lock in these attractive prices.
Are Adjustable Rate Mortgages Ever Better?
Adjustable rate mortgages are sometimes more attractive for homeowners who expect to receive a large amount of income or capital sometime in the near future. That's because adjustable rate mortgages usually have an introductory fixed rate which ends up being lower than a regular fixed rate mortgage.
Thus, it's possible to start with an adjustable rate mortgage, pay off a large portion of the principal while the initial fixed rate mortgage is still in effect. Once the adjustable rate kicks in, it's then possible to switch to a fixed rate mortgage with another lender.
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