Many homeowners who take out Adjustable Rate Mortgages experience payment shock when their teaser rate runs out. This is because many borrowers don’t understand the difference between the teaser rate and the contract rate of their Adjustable Rate Mortgages. Here are several tips to help you avoid contract shock when refinancing with an Adjustable Rate Mortgage.
The larger the difference between the teaser and the contract rate, the greater the chances of contract shock for the unsuspecting homeowner. Here’s an example of how a teaser rate can land you in hot water.
Suppose you refinance your mortgage with an Adjustable Rate Mortgage at 2.95%. This is an amazing deal that should be setting of warning bells; however, this teaser is only valid for 12 months. At the end of the 12 month period the teaser will change to the contract rate. The lender will then adjust the contract rate to the index plus margin. The margin is your lender’s markup to boost their profits. This results in a contract payment amount that is hundreds of dollars higher than the teaser amount.
Payment shock with Adjustable Rate Mortgages only occurs when homeowners don’t pay attention to the details of their loans. When used properly, and adjustable rate mortgage with a teaser rate can save you thousands of dollars in mortgage finance charges. You can learn more about refinancing your home using an Adjustable Rate Mortgage with a free mortgage tutorial.
Author: Louie Latour
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Louie Latour specializes in showing homeowners how to avoid costly mortgage mistakes and predatory lenders. To get your hands on this free video tutorial: “Mortgage Refinancing – What You Need to Know,” which teaches strategies for finding the best mortgage and saving thousands of dollars in the process, visit Refiadvisor.com.
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Fixed Rate or Adjustable Rate Mortgages Better
The most basic distinction between different mortgages depends on how the interest rate is charged. There are two types of mortgages, the first one is the fixed rate mortgage and the second is an adjustable rate mortgage. Generally, the lenders offer a very low starting rate which is also called a teaser. These rates lure the investors in to accepting the loan scheme and they end up paying higher interest rate as and when the rate of the underlying index increases.
Fixed Rate Mortgage vs. Adjustable Rate Mortgage
Lenders often offer adjustable rate mortgages with a very low first year ‘teaser’ interest rate. After the first year, though, the interest rate on your mortgage can increase by leaps and bounds.
Adjustable-Rate Mortgage Reset will Fuel Foreclosures
The “teaser” home purchase loan group is expected to see 32 percent of those mortgage defaults because of resetting, while 12 percent of subprime loans are expected to default.
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