Many home buyers prefer adjustable-rate mortgages because the initial interest rate is lower than a fixed-rate mortgage. However, the variable mortgage rate can increase over the life of the mortgage. Home buyers need a way to calculate the total cost of the mortgage and the amount of later payments. They can then compare different plans to determine the best mortgage deal. Home buyers considering an adjustable-rate mortgage can use a free online calculator to calculate a variable mortgage rate. They can then compare both variable rates and fixed rates in mortgage offers.
Access an online adjustable-rate mortgage calculator (see Sources). Write down each item required to calculate a variable mortgage rate. Writing these items down provides a good checklist of items to ask for when negotiating a deal with mortgage lenders.
Ask a lender that has made an offer for a copy of any proposed variable-rate mortgage. Ensure that the copy includes all the items needed by the calculator to calculate the mortgage. This step will allow for more accurate estimates than simply guessing what a lender would offer.
Use the numbers from any lender offers to enter all the required information into the calculator. However, the “expected adjustment” depends on interest rates in the overall economy, so this figure is an estimate. The calculator provides a default figure to use for this if the home buyer does not have an estimate.
Enter “12” for the “expected adjustment” to get the estimated highest possible mortgage rates and total interest and payments. This would occur if the interest rates in the economy exceed the maximum interest rate of the mortgage for the entire time of the variable rate.
Choose to show the amortization schedule by the month. This will give you the exact mortgage payment for each month throughout the life of the mortgage loan. Click the “Calculate” button to see the numbers.
Look at the graph on the next page to see how much total mortgage interest you will pay over the life of the loan. The “Mortgage Summary” table also gives you the total payments and total interest of the variable-rate mortgage. You can also look at the “Payment Table” to see what you would pay each month over the life of the mortgage loan.
Additional Adjustable-Rate Mortgage Tips:
Consider the ability to pay the maximum payment in the event the interest rates rise to that level after the variable rate begins. A lower amount of total interest is a good goal, but the home buyer may get a lower maximum monthly payment with a different offer.
Include fixed-rate mortgages in the comparisons. A fixed-rate mortgage may provide a better deal if the home buyer can afford the initial payments.
Look carefully at the interest-adjustment rules of any lender offer. Lenders often have a margin. The margin is an increase in the mortgage rate over and above any increase in national interest rates.