Author: Ryann Cairns
One important feature of any adjustable rate mortgage is the annual review period. It is during this important time that the interest rate may be recalculated, and the monthly payments may rise or fall depending on the direction of the underlying interest rate.
Many times the annual review is also the time when the homeowner has the option to convert the variable rate mortgage loan into a fixed rate. Whether it makes financial sense to do this or not, of course will depend on the current interest rate being offered and the expected direction of interest rates. Interest rates are notoriously difficult to predict, even for experts, and few people are able to accomplish this feat consistently.
This is one of the things that makes a variable rate mortgage, and its associated annual review period, somewhat problematic. You are being asked to in effect make a prediction on the direction of interest rates. This is a difficult task even under the best of circumstances. When the annual review period rolls around each year, a mistake on the part of the homeowner could end up costing lots of money in higher interest rates and higher monthly payments.
The annual review can be a helpful feature as well though. If interest rates have fallen over the past year, the annual review can offer the homeowner the chance to save money through a lower interest rate and lower monthly payments. Lower monthly mortgage payments can mean more money in your pocket and even a chance to pay off the home mortgage loan early. No matter what the terms of your annual review period, it pays to know all the terms and conditions of your variable rate mortgage loan up front.
The most important thing to know is the interest rate cap. This is the highest interest rate that can be charged on the mortgage. If interest rates were to rise significantly between the annual review periods, you could very well find yourself facing the highest possible interest rate. It is important to calculate the monthly mortgage payments under such a scenario, and make sure you could still afford them were they to rise to this level. While it is unlikely that rates will hit the cap, it is always a possibility.
It is important to use the annual review period to its best advantage. A month or two before the annual review period arrives, take some time to research the probable direction of interest rates. Of course the experts will not be right 100% of the time, but they can at least provide a clue on where rates are headed. Use this information to your advantage during the next annual review period.