QandAs: Loans

What is a Rate Adjustment?

Answer:
A rate adjustment occurs when the lender changes

the interest rate on a mortgage loan. When a rate adjustment occurs, the rate can increase or decrease, depending on market trends. Rate adjustments are common with adjustable rate mortgages, which is why these loans are extremely risky. Homebuyers choose adjustable mortgages for various reasons.

In many cases, they need an ARM to qualify for a specific mortgage amount. In addition, some buyers choose to benefit from the low initial rates. Still, adjustable mortgages are a huge gamble because an increase in interest rate usually means a higher monthly payment.

Rate adjustment periods vary according to the type of loan. For example, if you choose a 3-1 adjustable rate mortgage, the initial low rate will remain the same for the first three years, and adjust every year thereafter. The same is true with a 5-1 adjustable rate mortgage. Likewise, the interest rate stays the same for the first five years, with possible rate adjustments every year thereafter. Because market conditions are unpredictable, and mortgage rates do fluctuate, a sudden rate increase can leave homeowners financially strapped. Still, rate adjustments are not always terrible. A mortgage rate decrease can lower monthly payments. On the other hand, if rates start to increase, so will your monthly obligation.


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