When Adjustable Rates are Beneficial

Adjustable rates on mortgages, on the whole, are a bad idea. They leave you with a degree of unpredictability regarding the cost of your loan. This makes it hard to compare when you are sourcing the loan. Furthermore, you may end up paying far more for a home than you initially anticipated. However, there are a few unique situations when adjustable rates are not an altogether bad idea. You must use the option carefully, but you may benefit financially.

Your Income Will Increase

If you have a very low income right now, but you expect your income will increase quickly, then an adjustable rate may not be a bad idea. Your monthly payments at the beginning of your mortgage will be fairly low, making it affordable with your low income. As the payments go up, your income will also go up, and you will be paying a relatively similar proportion of your income each month. Of course, income increases are not guaranteed. You should have funds set aside in case you lose your job or suffer a drop in income.

Your Credit Will Increase

You may have very poor credit at the beginning of your mortgage. This is especially true for people who are just recovering from a bankruptcy or foreclosure on a previous home. It may be very hard to get a loan, and lenders will want protection against default, late payments and other problems with your mortgage. Agreeing to an adjustable rate may be the only way to get financing. As you continually make loan payments each month, you may even see your rate go down instead. Getting a rate decrease is usually only possible if you are willing to continually negotiate your loan, however.

You Plan on Moving Soon

If you are only going to be in your home for a few years, then an adjustable rate may be very beneficial. The low introductory rate will make your mortgage affordable in the short term. You will prepay the mortgage early on, before the rates ever adjust to a higher interest. There will be penalties for prepaying, but you may still come out on top in this option. This option is often used for young couples before they start a family. You should only consider this if you are planning on moving within 5 years. Most adjustable mortgages will go up within 3 years.

You Can Lock in a Future Rate

If you can control how high your rates will adjust, an adjustable rate is not that different than a fixed rate. For example, some lenders may agree never to charge you more than the 3% above your initial rate. Others may contract to never charge you more than a certain percentage above the national prime interest rate. Both of these options will give you some assurance against your loan rate jumping to a level you cannot afford. Consider this option if your lender insists on an adjustable rate.