After the financial crisis, variable mortgages got something of a bad rap. With so many people losing their homes to foreclosure, there was a bad taste in many mouths regarding variable rate mortgages, since many of those struggling had these types of mortgages.
While a variable rate mortgage isn’t for everyone, it can be a good choice for certain homebuyers. As long as you understand what you are getting into, a variable rate mortgage can be helpful to you.
Lower starting rate
One of the reasons that variable mortgages can be attractive has to do with the lower starting interest rate. However, if interest rates go up, so does your mortgage rate. In order to make a variable rate work for you, it’s important to talk to the lender about caps.
Many mortgage lenders now stipulate that a mortgage rate can only go up by a limited amount, such as 0.25 percent at each adjustment. On top of that, it’s possible to get a mortgage rate that caps out at a certain level. So, you might start with a 4.25 percent rate, and the cap might be 6.0 percent.
When you get a variable mortgage, make sure that you will be able to make the payment at the highest level. It’s best to choose a mortgage that only allows for the most gradual of increases as well, so that you are able to acclimate yourself to the rising payment.
Another possibility is to refinance to a fixed rate once rates start rising with regularity. However, you need to be careful when you try this strategy. It’s important that you have enough equity built up to qualify for a refinance later on. Many people who go this route succeed when they can use a large down payment to provide immediate equity. That way, if the home loses a little bit of value, they aren’t stuck with rising mortgage rates and an inability to refinance.
Your best option, if you think you will refinance, is to use a large down payment, and set up bi-weekly payments. This way, you will be in a good position to fix your rate if you feel you need to refinance.
As long as you are able to handle the realities of a variable mortgage, you should be able to make it work for you, even if it goes against the conventional advice provided to many homebuyers.