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What are adjustable-rate mortgages?

Like many in Washington, D.C., you will likely need a mortgage in order to purchase a home. However, mortgages come in many forms, including adjustable-rate mortgages and fixed-rate mortgages. At Ammerman & Goldberg “Bankruptcy” Law Office, we know that choosing the right mortgage option may be overwhelming. Since falling behind on your mortgage payments could open you up for foreclosure and put your hard-earned home at risk, it is important that you understand what adjustable-rate mortgages are.

Adjustable-rate mortgages are a type of home loan for which the interest rate periodically changes. According to the Consumer Financial Protection Bureau, this may cause your mortgage payments to rise or drop over the course of your loan term. Often, lenders offer lower initial interest rates for adjustable-rate mortgages. This may make this type of loan easier for you to manage at first. However, if the interest rates rise, you may be obligated to make higher mortgage payments than you are able to afford.

The interest rates on adjustable-rate mortgages are made up of a margin and an index, according to the Consumer Financial Protection Bureau. The margin is an extra percentage that the lender adds to the interest rate. The index, on the other hand, is a general measure of interest rates. For example, if the index is four percent and the margin is three percent, then the fully indexed rate for your loan would be seven percent.

Often, caps are placed on the interest rates for adjustable-rate mortgages. Such caps limit the amount that your interest rate is able to increase. Periodic adjustment caps limit the amount a rate is able to rise or drop from one adjustment period to another. This differs from lifetime caps, which limit the amount that interest rates are able to increase over the life of your home loan.

For more information about mortgage issues, please visit our Foreclosures page.

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