Understanding Adjustable Rates
Choosing an adjustable interest rate plan for your
second mortgage loan can be an attractive option. While
fixed rate loans do offer the security of knowing your
payment will remain the same as far as interest rates,
many consumers do not like the idea of being “locked
in” and unable to take advantage of lower rates
when they occur.
Indeed, if interest rates seem to be on a general down
trend, an adjustable rate mortgage loan might be a wise
choice. The interest rates on such mortgage loans are
“pegged” to a specific index, for example
the one used for Treasury securities.
Many lending institutions will advertise a very attractive
“teaser” rate for their adjustable rate
loans. It may be as much as two or three per cent lower.
When shopping for a lender for your second mortgage
loan, remember that this interest rate will most likely
not last beyond the time period indicated in the loan
At that point, depending on the parameters specified
in the loan agreement and the movement of the index
with which the rate is associated, the interest rate
on your second mortgage loan can, and often will, move
The key to deciding between the two types of financing
options for your second mortgage loan is having a good
understanding of both options. While it is fine to be
poised to take advantage of better rates should the
market act favorably, you need to have a realistic assessment
of how your budget can handle a “worst case scenario”
interest rate situation.
Always keep in mind that taking out a second mortgage
loan of any type is a major commitment and you are pledging
one of your most important assets – your home
– as collateral.