A few days ago in the US, mortgage borrowers faced crises as the mortgage market was in a catastrophic state. Interest rates had gone up to such a level that borrowers were not able to make their payments. The mortgage market suffered terribly, as the number of foreclosures reached an unprecedented level.
Financial market analysts believe that such a cataclysm could have been avoided if people had gone for the capped mortgages and are of the opinion that the interest rate of the capped mortgages might have proved beneficial in this regard. The mortgage rate of capped mortgages, is basically fixed and allows mortgage borrowers to have a definite idea of the payments.
In capped mortgages the maximum rate is incorporated in the calculation itself. This means that even if rates go up, payments might not be affected. In these capped mortgages, borrowers have a thorough knowledge of the maximum amount that needs to be paid. The payments are liable to reduce, once rates decrease.
On such occasions, borrowers are required to pay in two different ways:
they can either pay lower payments, or
they could even pay their installments, after every other week.
Due to the cap, borrowers are saved from any potential hike in rates. The cover enjoyed, however, comes in with a certain price. With capped mortgages, lenders are liable to charge slightly more than the actual cost of the mortgage’s rate. Despite the higher price, customers are left with some peace of mind, as they are secure in the knowledge that the rate would never go beyond, what could be called, the maximum.
The interest rate of the capped mortgages is primarily a negotiation between the fixed and variable rate. This implies that the mortgage rate could be a touch higher than the fixed. There are three kinds of mortgage rates that are calculated based on the details, such as duration, of the loan amount:
Mortgage rates in the adjustable denomination are calculated based on the fact that these mortgage rates are liable to change.
Adjustable-rate mortgages primarily offer better interest rates compared to their fixed counterparts, however the rates change, owing to the variations in the treasury bills’ or the prime rates. Interest rates are manipulated in order to establish parity with market rates. Although the borrower is given the protection of the ceiling, a contemporary term for the maximum limit, ceilings are liable to change every other year or so.
Last Updated on : 24th August 2013