The Finance Blogger

One of our readers left a question about adjustable rate mortgages and whether we thought they should consider changing from a fixed rate mortgage to an adjustable rate mortgage. They have 15 years left on their mortgage. The couple is considering switching to an adjustable rate mortgage with a lower interest rate!

They have an excellent credit rating. As a result they should have no problem renewing their fixed rate mortgage or an adjustable rate mortgage. They wanted to know about the changing interest rates and whether we thought interest rates would change. They seemed a bit concerned about interest rates going up significantly. As of this update in 2013, interest rates are rising and there is no forecast of how far they will go.

Adjustable Rate Mortgages

Basically an adjustable rate mortgage is just what it sounds like. The interest rate will be adjusted at defined intervals that are based on an index that each bank follows plus some percentage to reflect the banks required profit. This index can change regularly and if you have an adjustable rate mortgage, your mortgage payments will be adjusted to reflect this change.

Adjustable rate mortgages are usually at a lower interest rate than a fixed interest mortgage at time of renewal, however while your fixed interest mortgage will stay the same for the term you have contracted for, your adjustable rate mortgage will change as often as every month or every 6 months depending on your agreement.

Changing Interest Rates and Adjustable Rate Mortgages

Well, we would all be very rich if we could predict where interest rates will go. They have been kept low for the past 4 years as a result of the depressed economy in the US and around the world. Recently several countries are beginning to raise rates slightly and the Canadian and US Governments have indicated that interest rates will likely begin to rise in late 2011 or early 2012. Still it is a guess regarding what will happen.

Most people think that rates will be going up, however very few think they will increase substantially. Still if your rates went up by 3 or 4 %, it could make a significant difference to your monthly payments. Can you afford the change and can you sleep at night or will you worry about the increasing rates?

Sleeping at Night

If you are the type that worries about finances, then going to an adjustable rate mortgage might not be the best solution for you even if you must pay a slightly higher rate by going with a fixed mortgage interest rate. Knowing that your monthly payment will not change can be comforting to many people.

It is basically a gamble as to whether the rates will still the same or not. This is really what you need to evaluate. If you are renewing for 5 years and you are saving 1% on an adjustable rate mortgage, would you be further ahead or not. If the rates went up by 2% halfway through the life of the mortgage term would this matter to you? Ask your lender to do some calculations for you with various scenarios . Evaluate your risk / tolerance level for an adjustable rate mortgage changes.

If you have  a question, leave us a comment with as much detail as you can. We will try to answer your question in our next post. Alternative check out the various categories on the right side for any posts covering your area. For more information about new mortgages, click here.

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