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gives the borrower a chance to increase his/her annual earnings before payments rise); (b) a maximum (cap) that interest rates can rise in any year (if there is a cap, it must be specified in the loan document); and (c) a maximum (cap) that interest rates can rise over the life of the mortgage (this also must be specified in the loan document).
Before considering an Adjustable-Rate Mortgage, carefully consider the pros and cons. Doing so will help you avoid accumulating too much house debt and monthly payments you cannot afford. Payments that are too high lead to bankruptcy and emotional stress. In most cases, a fixed rate conventional loan is the best decision.
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Before you shop for an Adjustable-rate Mortgage, ask yourself the following questions:
1. Is my income likely to increase enough to cover higher mortgage payments if interest rates go up?
2. Will I be taking on other sizeable debts, such as a loan for school or school tuition in the near future?
3. How long do I plan to own the home? If you plan to sell soon, rising interest rates may not pose the problem they do if you plan to own the house for a long time.
4. Can my payments increase even if interest rates generally do not increase?
Mortgage Loans 13