Why Would a 5 Year Adjustable Rate Mortgage be Right for You?

A 5 year adjustable rate mortgage may give you the lower payment you seek. Due to the recession in the US economy, most home buyers become desperate to purchase homes that have reduced cost or are discounted. In order to do so, searching for various types of mortgages compared to the conventional ones such as the 30-year or 15-year fixed mortgage loans. Among these alternatives, home buyers will soon find out that a 5-year or a 7-year adjustable rate mortgage loan attractive for several reasons.

In the scheme of a 5- or 7-year adjustable rate mortgage, the borrower settles the monthly dues at the predominating fixed interest rate and will not change for the first 5 or 7 years, whichever is chosen. Usually, the longer is the term chosen, the higher is the rate. So then, it is to be expected the monthly rate for a 7-year term is greater than that of a 5-year term. The payments for this fixed period are not usually amortized and are for interest only, meaning that the whole payment goes to the interest only and none of such payment goes towards reducing the principal.

Though that is the case, this is popular among people in the way that it helps lower the monthly payment. For homeowners or borrowers with a fixed salary or income, this type of scheme assists them in affording more expensive properties compared to having a fully-amortized 30-year fixed rate.

And, if the borrower or homeowner has already decided ahead of time that he would sell the property after quite some time, why choose to pay the higher interest and monthly payment of a 30-year fixed rate? So, the best choice in that case is the lower interest and monthly payment adjustable mortgage loan.

Banks and some lending institutions look at the borrower’s credit rating (i.e. ability to settle the loan) when they consider a borrower’s request for some financing. The primary thing that they look at is the borrower’s salary or earnings. In the case of self-employment, the borrower’s ITR and profit and loss statements, as prepared by a certified public accountant, are the ones checked. Usually, the debt-to-income ratio acceptable for banks is no more than 45%. For example, if the borrower’s monthly income is 10,000, then, the combined amount of his debt, loans, taxes, insurances, etc should not exceed 4500 in order to qualify for the loan. This is troublesome for homeowners or borrowers and some cutting back may be required. Credit cards should be paid off in order to qualify.

 

This is one of the reasons why a 5-year adjustable rate mortgage is popular for most home buyers. Since the monthly payment will only consist of the interest only, it will apparently be lower than the same loan amount at a fully amortized payment. This may be the token for qualification.

However, the disadvantage is that a 5- or 7-year adjustable rate mortgage will not stay fixed for eternity and eventually, after 5 or 7 years, will become an adjustable rate. Since we cannot say absolutely what rates will be like in 5 or 7 years, this is a big risk that the borrower will make. Take advantage of lower rates all the time.