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More Information
Second Mortgage
Why Take Out a Second Mortgage?
Traditional Second Mortgage
Home Equity Line of Credit (HELOC)
Preparing Your Credit
Preparing to Apply
Understanding Fixed Rates
Understanding Adjustable Rates
Shopping for a Lender
Locking in a Rate
Understanding Points
High-Interest Debt: A Way Out
Paying for College
Home Renovation
Using the Internet to Research
Payment Comparison
An Affordable Monthly Payment
Private Mortgage Insurance
HELOCs and Monthly Payments
The Role of the Loan Officer
 

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 agreement.

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 upwards.

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.