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An adjustable rate mortgage is a great way to get a very low rate, fixed, for the beginning of your life as a homeowner. These are especially great when you can refinance before your rate begins to adjust heavily. When you are looking at an adjustable rate mortgage, be sure to ask about the ‘prepayment' penalty that is associated with it.
A prepayment penalty usually prevents a homeowner from selling or refinancing their adjustable rate mortgage before it is too late. These prepayment penalties typically equal between 1-5% of your principle balance if you sell or refi too early. Many people assume these clauses due to the fact that you can often get a reduced rate for such a penalty clause. In an adjustable rate mortgage, because of the potential for high adjustments, it is extra important to avoid a restrictive prepayment penalty.