The Future of Adjustable-rate Mortgages

When it comes to buying a home, there are two main types of mortgages out there for prospective buyers: fixed- and adjustable-rate. Fixed-rate mortgages, as the name suggests, involve paying an interest rate that remains stable for the duration or term of the loan. On the other hand, in an adjustable rate mortgage, the interest rate changes according to market fluctuations. Adjustable rate mortgages are also known as variable- or floating-rate mortgages. Read on to find out more about their current popularity and how they will fare in the future.

Popularity

Adjustable-rate mortgages are not nearly as popular as fixed-rate mortgages in the United States. One of the reasons for this is that fixed-rate mortgages are available for long terms; 15- and 30-year terms are most popular. In countries where adjustable-rate mortgages are more common, including the United Kingdom, Canada, New Zealand, and Australia, fixed-rate mortgages with terms longer than ten years are often not available. For instance, in Canada, it is difficult to find a fixed-rate mortgage with a term longer than ten years. In the United States, adjustable-rate mortgages surge in popularity during housing booms. When houses appreciate very quickly, borrowers are more likely to take out an adjustable-rate mortgage.

Predictions

Adjustable-rate mortgages will continue to play second fiddle to fixed-rate mortgages. Whether a prospective homeowner decides to go with an adjustable-rate mortgage depends on his or her unique situation. Although an adjustable-rate mortgage can result in you paying significantly less interest on the money you have borrowed – particularly at the beginning of the loan – it can be a gamble. Especially on big-ticket purchases like property, most people are not willing to deal with interest-rate risk and prefer consistency and security to the stress of wondering how they might cope if rates increase.

Pros

In spite of the fact that adjustable-rate mortgages come with risks, they do have some significant benefits. Firstly, the initial interest rate is usually lower than that of a fixed-rate mortgage, which is usually calculated to take interest-rate fluctuations and inflation into account. And unlike fixed-rate mortgages, the interest rate on your mortgage may actually drop. Most of the time, adjustable-rate mortgages make sense for those who plan on selling their house within a few years. The short-term savings on interest payments will be worth it.

Cons

The main downfall of an adjustable-rate mortgage is the risk. Rates can increase at any time. If you purchase an adjustable-rate mortgage when interest rates are low, you can pretty much expect the interest rates to rise. The first increase may be substantial, as well. Unfortunately, these changes can make it harder for you to budget for the future. If you have to refinance your mortgage, you may end up paying through your teeth for it. For many, this causes too much stress to be worth it.

Quick Wrap-Up

The main difference between a fixed-rate mortgage and an adjustable-rate mortgage is the interest rate. Adjustable- or variable-rate mortgage interest rates change according to the market. As a result, they can be risky when rates suddenly increase. On the other hand, borrowers may save money if rates decrease.