Who it is for
- You are confident you will sell or pay off the loan before the first adjustment, and you have a backup if that plan slips.
- You understand the maximum the rate can reach, not only the start rate.
- A fixed rate is available and you have compared the two on purpose.
How it usually works
- Ask for the initial fixed period, the index, the margin, and the caps: each adjustment, and the lifetime cap.
- Price the payment at the fully indexed rate, not only at the teaser.
- If the worst-case payment does not fit your budget, do not take the loan because the first year looks easy.
Read this before you get attached
- Indexes move. A cap limits the change. It does not keep the rate at today’s number.
- You may not be able to refinance later. Credit, home values, and guidelines change.
Questions worth asking
- What is the highest rate this loan can reach, and what would that payment be?
- How often can it adjust, and by how much each time?
- What index is used, in writing?