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MBA Urges Regulators To Avoid Invoking Suitability Standards
The Mortgage Bankers Association (MBA) recently made a preemptive strike against what it obviously perceives as the next threat against the mortgage industry - "suitability standards." Read more...

 

Basics Of Adjustable Rate Mortgage

If you're a homeowner that used or is considering using an adjustable rate mortgage to finance your home, there are number things that might go wrong with your mortgage. Here is what you need to know about these somewhat risky mortgage products.

Adjustable rate mortgage loans are a type of loans that come with variable interest rates; the lenders will adjust the interest rate and the monthly payment amount to the going rate plus their markup at regularly scheduled intervals. The advantage of this type of loan is the initial low monthly payment amounts. Amortization is the process of gradually paying down your mortgage loan over a long period of time. The problem with adjustable rate mortgage loans is that there are circumstances where this loan results in what is known as "negative amortization," which means your mortgage is actually growing over time.

If your adjustable rate mortgage loan comes with payment caps that limit the amount the lender can raise your payments; there are circumstances where the cap will prevent the monthly payment from going up when the lender adjusts the interest rate. If the payment cannot go up because of the payment cap and the interest rate does go up, where does the interest due that you are not paying go? This unpaid interest is tacked onto the balance of the loan and this means that your mortgage will actually be growing instead of being gradually paid down.

Negative amortization also happens to homeowners with option adjustable rate mortgage loans that only pay the "optional" payment amount each month. This optional payment keeps their account current but it does not cover all of the interest due for that month. The remaining balance due will be added to the principal loan amount, resulting in negative amortization.

If you are a homeowner with such a risky adjustable rate mortgage loan, you should consider refinancing before your monthly payment, and your mortgage gets out of hand.

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