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Home Loan Lending Type: Adjustable-Rate : What are adjustable-rate mortgage loans?

Every person who plans to take out a mortgage loan at some point in their life should have at least a passing understanding of the mortgage loan types. Adjustable-rate mortgage loans, also known as flexible-rate or variable-rate mortgages, feature interest rates that may rise or fall during the term of a loan. The change in interest rates is dependent on general market conditions.

Generally, the initial interest rate offered on an adjustable-rate mortgage is lower than that which is available with fixed-rate mortgage loans. Why? Because the long-range risk of an adjustable-rate mortgage loan is greater than that for a fixed-rate mortgage loan. To offset this risk, lenders will give lower initial interest rates to try and induce you to get a mortgage of this type.

The risk in an adjustable-rate mortgage loan lies in its unpredictability. The interest rates used in this type of loan changes with fluctuations in overall money rates. These fluctuations will cause changes in the monthly payments, the balance of the principal, and the term of the mortgage loan itself.
How are adjustable-rate mortgage loans determined?

There are a number of indexes that lenders use to adjust interest rates. Some widely-used indexes include the three-month and six-month Treasury bill rates, one-year to five-year Treasury notes, and the national average mortgage rate.

 Unless you know precisely what you are doing, taking out an adjustable-rate mortgage loan may not be a good idea. The unpredictability may be too much of a drawback for the average borrower.

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