An adjustable mortgage is one in which the interest rate on the loan fluctuates based on the current index rate available. The opposite of an adjustable rate mortgage is a fixed rate mortgage, where the interest rate remains the same throughout the entire life of the loan. While the adjustable mortgage itself does not lead to foreclosure, it can have consequences many do not realize.
The Adjustment Of Mortgages
Within the language of the contract of this type of mortgage is specific information, which outlines when and under what circumstances this type of loan can adjust. Most adjustable rate mortgages adjust according to the fluctuations in key indexes, which are large scale lending rates banks charge each other to borrow money back and forth. In some cases, the movements of the Federal Reserve in the United States can also influence the way in which adjustable rates move, either up or down. Some of these loans do not allow the interest rate to fall, only to rise.
When the interest rate rises, this causes a trickledown effect to the property owner.
- The interest rate increases on the loan.
- This increases the monthly payment for the homeowner.
- With an increased monthly payment, some homeowners are unable to make the payment easily enough.
- The rate can further increase, usually in spans of every six months to annually.
- If the rate continues to increase, the homeowner may no longer be able to afford the monthly payment on the mortgage loan.
- The property owner ends up missing payments.
- The lender forecloses on the property due to the missed payments.
Adjustable mortgage loans are not in themselves the cause of the foreclosure, simply because homeowners should be aware of the conditions and terms of these loans. When interest rates are significantly lower than average, investing in an adjustable rate mortgage is not as worthwhile, since it is unlikely the rate will fall further, therefore eliminating any benefit to the homeowner.
When To Hire An Attorney
Individuals who do not understand their adjustable mortgage or who are facing foreclosure due to adjustments in these loans should speak to an attorney. An attorney can help to negotiate new terms with the lender and help the homeowner to prevent foreclosure altogether. While this is not always possible, it can be more likely with the aid of an attorney. An attorney can also give legal advice in situations where the property owner was mislead in obtaining such a loan.
