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You may have read about many homeowners who are facing large payment increases from the initial payment structure of their loan. Payments which in many cases may be beyond their reach, you might ask, What went wrong? In order to have affordable payments entry-level buyers may have selected an adjustable-rate mortgage with a two or three year fixed term. This short-term adjustable-rate does not allow enough time for the property to appreciate in today's sluggish real estate market. The smarter choice would have been an adjustable-rate mortgage with a term of five to 10 years. However, not to all adjustable-rate loans are bad, the adjustable-rate loan has one big benefit, in that it is normally an interest-only payment structure which would save a buyer approximately $100 per month for every $100,000 borrowed and also allows payments to be reduced by the paying of principal.

Many of these adjustable-rate loan products have helped fuel the high appreciation rates of our market. And while I'm sure that in retrospect the average consumer would have chosen a product that had a longer fixed term built into it for a slightly higher payment. Now you can find adjustable mortgages with the 10 year term with very competitive pricing. When shopping for a mortgage you'll need to analyze the different programs and payments, then ask yourself how long you are expecting to be in this home. Once you've analyzed these factors, you will need to match your needs and goals to the term of your loan.

Lastly you need to understand that if you don't sell or refinance before the adjustment occurs your payment will substantially increase. What the payment will be? The note rate at the time of the adjustment is determined by adding the margin, a number usually between 2.5 and 3.5 that is determined by the bank with the other component of the rate which is the index. Typically used is the LIBOR index which changes daily. Adding these two components together will give you an approximation of what your payment will be at the time of the adjustment. If the level of this payment is going to be a concern for you it would be wise to consider taking a longer term note. Additionally you will need to understand that many loans come with a prepayment penalty, the cost of this is usually six months of interest if you pay off the loan early. Typically you can find a program that has no prepayment penalty in exchange for slightly higher interest rate. Be sure to ask which options are available and what the difference in cost for a loan without the prepayment penalty will be.

In conclusion, when you're shopping for a loan there are many factors that you need to consider when selecting the type of loan that you use. You will need to thoroughly analyze your situation, your goals, and your needs so that you can make an educated decision about what type of loan program is right for you. Keep in mind that adjustable-rate loans if used properly can have huge benefits for the borrower, but if used improperly or without respect they can endanger your financial future. So if you do decide to use an adjustable-rate loan make sure that you understand the terms and are comfortable with the idea that the payments will adjust substantially at some point.

Co-written by Randy Nathan and James Dedolph, creators of HomeSniffer.com where you can find Homes for Sale in San Diego and LoanSniffer.net where you can find the best rate and terms for Homes Loans in San Diego.

Both of these sites are a good resource for information about San Diego Real Estate.