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Mortgage rates have been historically low for the last few years, but they are on the rise. As interest rates inch up, adjustable-rate mortgages often become more attractive for some homebuyers. With 30-year fixed-rate loans sitting at 4.67%, the highest interest rate since 2018, the rate on one popular adjustable-rate mortgage is 3.5%.
As its name indicates, the interest rate a homeowner pays with an adjustable-rate mortgage changes over the life of the loan. After an introductory period, during which the rate is fixed and typically lower than that offered by a fixed-rate mortgage, the rate can go up or down. And that carries risk.
Borrowers avoided adjustable-rate mortgages after the housing market crash in 2008, but guidelines put in place since then require lenders to consider homebuyers’ ability to repay mortgages over the entirety of the loan, not just at the introductory rate. In 2022, interest rates are rising as home prices continue to soar, so the centralized banking system in the United States—its Federal Reserve—has raised a key interest rate to try to bring inflation under control.
To explain the mortgage market, real estate platform ZeroDown compiled a list of facts on adjustable-rate mortgages, including what they are, how they differ from fixed-rate mortgages, which factors affect interest rates and monthly payments in an adjustable-rate mortgage, and who can benefit from this type of mortgage.