If you are considering an Adjustable Rate Mortgage for your home mortgage refinance loan, structuring the loan properly can limit your risk and save you money. How do you manage risk with an Adjustable Rate Mortgage? Caps protect borrowers by limiting how much the interest rate or payment amount goes up when the lender adjusts your mortgage. Here are several tips to help save you money and limit your risk when taking out an Adjustable Rate Home Mortgage Refinance Loan.Caps limit change in your Adjustable Rate Mortgage’s interest rate and monthly payment amount. There are three types of caps: periodic caps that limit interest rate changes, payment caps that limit payment amount changes, and lifetime caps that limit total change over the life of your mortgage. Your caps must be a part of the loan contract or you have no protection from rising interest rates. Your loan contract will also specify the interval that your mortgage lender adjusts your mortgage loan, typically every year on the anniversary date.It is important to ensure that your Adjustable Rate mortgage has both periodic and payment caps. Homeowners that structure their adjustable home mortgage refinance loans with only payment caps often experience negative amortization when the payment cap does not allow the payment to go up enough with rising interest rates. When the interest rate rises too quickly the amount of interest due each month is not paid because of the payment cap, the unpaid amount is added to the mortgage principle. This results in a growing mortgage balance over time.You can learn more about your home mortgage refinance options and other costly mistakes to avoid by registering for a free mortgage tutorial.
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