Flexible payment mortgages are considered one of the more useful Adjustable Rate Mortgages, also known as an options mortgage.
This type of mortgage is useful for people whose income fluctuates over the year. Examples of this would be teachers. Teachers earn most of their money during a portion of the year. While teachers may find other jobs in the off season, their main income source is during the school year. Homeowners like these may be more comfortable having a mortgage with flexible payment.
A flexible payment mortgage is exactly what it says:
- A mortgage that allows you to select from a variety of payment options every month.
- It is quite possibly the most flexible version of the adjustable rate mortgage.
How are these home loans calculated?
The term “adjustable rate” is literal. At predetermined times over the life of the loan, it is recalculated based on the fluctuation of interest rates. A typical loan may start at 5.5% in a strong economy, rise to 6.5% at the first recalculation junction then fall to 5.3% on the next.
Of course your payments will reflect this accordingly. It is important to realize that a difference of 1% in the rate of a mortgage loan can add $100 or more to a payment, depending on how your bank does the calculation and the terms of the agreement.
Flexible payment or option mortgages are popular with people whose income is not uniform all year long. Another thing that makes flexible payment mortgages popular is a low introductory interest rate, which helps keep payments down through the early stages of the loan. These are especially helpful for the fist time home buyer. Ask yourself, “Do I need a flexible mortgage?”
You will want to make sure you understand what the rate will become after the introductory period. Most times, this can be significant. Sometimes, the rate can rise as much as 2% or 3%, so ask that question before you sign on the dotted line.
Cheap flexible mortgage repayment?
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Each month your statement will offer you several payment choices. The lowest option pays interest only; the highest option could be equal to a monthly payment on a conventional 15 year loan.
In between those would be something like a bi-weekly payment and a conventional 30 year mortgage payment. In the ideal situation, one of the higher payment options should be chosen often. If you only ever pay the lower options, your home’s equity could suffer and it is possible to end up owing more than you originally borrowed.
As in any adjustable rate mortgage, flex-pay mortgages have a higher cost when interest rates are on the upswing, and obviously lower in an interest rate downturn. Every five years the loan is recalculated and all your payment options are likely to change accordingly. This is the nature of all ARMs and should be expected.
Flexible mortgage help.
Admittedly, flexible payment mortgages are a bit complicated and are not the optimum choice for every buyer. Homeowners who can discipline themselves to make the higher payments often could find flex-pay adjustable rate mortgages appealing.
The main point being that when money is tight, you should choose one of the higher options. Simply paying the interest only is folly, to say the least, as it does nothing to the principal or your home’s equity.