A home loan whose interest rate is subject to change, and whose amount must be fully paid at the end of the term. In a typical mortgage loan, the principal is scheduled to be paid off, or fully amortized, over the term of the loan.
Full amortization refers to the period of time necessary to pay the mortgage completely. If the mortgage contains a 30 year amortization period, the mortgage will be paid in 30 years, unless prepaid before the end of the term. There are no balloon payments in a fully amortized adjustable rate mortgage.
Because the interest rate of adjustable rate mortgages will change over the term of the mortgage, the monthly payment will also change to keep the amortization schedule on track. With the rate increase, the amount paid to principal each month will remain the same as with the original interest rate.
A homeowner has a $200,000 adjustable rate mortgages with an initial interest rate of 5% and a 30 year term. The initial monthly payment will be $1,079.00. If the interest rate increases to 5.25% in year 3, the payment will also increase to $1,102. The additional $23.00 in monthly payments is necessary to compensate for the .25% increase in the interest rate.
A fully amortized adjustable rate mortgage is in contrast to a variable rate mortgage, where the monthly payment remains the same despite a change in the interest rate. In a variable rate mortgage, the amortization period changes.
Because an increase in interest will have a direct effect on the monthly payment of the mortgagor, the borrower should be aware of a potential increase in monthly payments. On a $200,000 mortgage, a 1% rate increase will increase the monthly payment $116.00, from $1,074.00 to $1,190.00.
There are mortgage calculators available to determine the increase in monthly payments a given rate increase will cause. There are also mortgage products available that can limit the total interest increase over the life of the loan, as well as the frequency of rate changes, and limits on the amount of each rate change. These terms should be discussed fully with your mortgage professional.
For more information on applying for an fully amortized adjustable rate mortgage, contact Meridian Mortgage at 317-968-9500 or contact us online.
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