Pros and Cons of 15 Year Adjustable Rate Mortgages

Fifteen year adjustable rate mortgages are a type of mortgage loan in which your interest rate will fluctuate based on a financial index. Here are some of the pros and cons of using a 15 year adjustable-rate mortgage to purchase a home.

Quicker Payoff

The big advantage of this type of mortgage is that you can pay it off early. The term of your loan is only 15 years which means that it is exactly half of what a traditional mortgage is. This will allow you to eliminate a mortgage payment in half the time. Being able to live in your home without having a mortgage payment can open up a world of possibilities for you.

Save on Interest

Another advantage of using this type of loan is that you can save significant amounts of money. When you pay off your loan in half the time, you are cutting off large amounts of interest that you would have had to pay. The savings of getting a 15 year mortgage over a 30 year mortgage could be as much as the cost of the house itself. This will put you in a much better financial position overall.

Bigger Payments

One of the big drawbacks of using a 15 year adjustable-rate mortgage is that you will have to make larger payments than you would if you paid over the course of 30 years. When they have to pack that much money into half the time, they have to make the payments quite a bit bigger. This can be difficult to fit into your budget depending on your financial situation. Many people cannot justify making the bigger payments as part of their tight budgets.

Smaller House

Another potential disadvantage of using a 15 year adjustable-rate mortgage is that you cannot qualify for as big of a house. Since the payments will be larger, this means that the amount of money that you can borrow will be reduced. You can only afford so much of a monthly payment which means the total amount of the loan will have to be reduced. 

Fluctuating Payment

With a 15 year adjustable-rate mortgage, the payment will fluctuate. Many people do not like the idea of not knowing how big of a mortgage payment they will have. When you have an adjustable-rate mortgage, you have to live with fluctuations in market interest rates. If the interest rates go up significantly, you will have to deal with a potentially much larger payment. In some cases, people have had their payments doubled in a relatively short amount of time. 

With this type of mortgage, your payment will be tied to a financial index. When the index moves up, your payment will be recalculated and you will have to make a new payment. Typically, this will happen every year. With some adjustable-rate mortgages, the interest rate will be fixed for a certain amount of time and then it will switch over to an adjustable-rate. You need to be educated about the risks of adjustable mortgage rates before signing up.

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