What are Adjustable Mortgage Rates?

In simple terms, an adjustable mortgage rate is when the interest rate changes, you do have a fixed rate in the beginning but the rate can change monthly or yearly. The rate is determined by the credit markets, index rate, and lender.

Types of Adjustable Mortgage Rates

There are 3 different types of adjustable mortgage rates: hybrid, option, and cash flow.

Hybrid Adjustable Mortgage Rates: This type of mortgage rate is the same for a certain amount of time at the beginning and then will change after. It is called a hybrid because it has both a fixed rate and then adjustable rate. The rates are set up on a payment schedule and when the rates adjust, the payment schedule is adjusted accordingly.

Option Adjustable Mortgage Rates: Within the option adjustable mortgage rate, there are 4 different options to choose from. A specified minimum payment, interest-only payment, 15-year full-amortized payment and 30-year full amortized payment (assuming the typical 30 year adjustable mortgage rate). When an individual pays their monthly fee, they can pay the minimum amount, which means that they can still owe money for that month. The money left over will then be added to the next months loan balance and the rate will be adjusted accordingly. The payments are typically lower during the first year and then can increase greatly depending on your payments. Option adjustable mortgage rates are better for people with a constant growth in income.

Cash Flow Adjustable Mortgage Rates: This option is a little more flexible and gives a person the option to choose their own monthly payments (from approved options). It is considered a minimum payment option because the mortgage loans are lower, since the person gets to choose their own. This option of minimum payment is typically only available for the starting years of the loan.

Keep in mind that adjustable mortgage rates can be good because of their low interest rates at the beginning but they are subjected to change once the fixed-rate period ends. The interest rates can go lower but they are more subject to increase. It is also difficult to predict what your rate will rise to once the fixed-rate period ends.