How high can an adjustable interest rate go?

All adjustable mortgaged have what is known as a CAP. This is the highest your interest rate can go. Unfortunately, it is usually much higher than the average homeowner is comfortable with. In almost all cases there are better options through refinance.

Many of these adjustable loans are coupled with a 2 or 3 year prepayment penalty. This means you will pay a significant penalty if you payoff the loan early. This includes refinancing the property. This can put many homeowners between a rock and a hard place as the interest rate rises your payment rises accordingly. Many homeowners find themselves with a payment they can’t afford and a prepayment penalty if they try to refinance into a better solution.

In many cases it may still be a good idea to get out of the adjustable rate loan and into something fixed….even with the prepayment penalty. Here are some examples using a $300,000 loan amount with a $10,000 prepayment penalty.

If you have 2 years left in the prepayment penalty period then all the above cases benefit you. If you have 1 year left you would have to weight additional factors such as the affordability of the payment you are making now. If it is creating a burden this may outweigh the recoup factor. You may also be in a negative amortization loan which is compounding the problem.

None of us have the ability to say what interest rates will be in 1 - 2 years but you can safely say that adjustable rates will usually continue to rise until they reach the CAP rate.

If you are unsure whether refinancing makes sense for your particular situation contact me for a FREE loan evaluation.

Popularity: 2% [?]