Fixed vs. Adjustable Rate Mortgages
A fixed rate mortgage means that the interest rate charged on the loan doesn’t change for the life of the loan. A variable rate mortgage has a rate that is usually tied to the prime lending rate. If this rate goes up, the interest rate charged on the mortgage will increase. If the rate goes down, the interest rate on the mortgage will decrease.
Fixed Rate Benefits
There are many factors to consider before you decide on a type of mortgage. One advantage of a fixed-interest rate loan is that your monthly payment doesn’t change, at least not from the loan. Property taxes and home owners insurance are often bundled into your monthly payment. If those amounts change, your monthly payment amount will change. Still, a fixed rate loan can make it easier to budget.
ARM Benefits
Variable or adjustable rate mortgages have many different variations. Some might have a very low rate for the first few years and then switch to a rate that’s tied to the prime rate. If you plan on selling your home within a few years, this is a way to lower your monthly payments. If you plan on staying put for a long time, this might not be a good option.
Some adjustable rate mortgages have a lower interest rate for a number of years and then have a balloon payment. If you plan on selling before the balloon kicks in, you could take advantage of the lower rates. This type of loan only makes sense if there is no pre-payment penalty. Some lenders will have a hefty fee if you pay off the loan before the end of its term.
Interest rates have been at historic lows. Its safe to assume that rates will go up over time. Adjustable rate mortgages have protections against sudden increases in the prime rate. Find out how much the rate can increase in a year. Also, there is usually a cap on the highest rate that can be charged.
If you shop around and compare loans, don’t just look at the APR (annual percentage rate). The amount that lenders charge for origination fees and other charges can vary greatly. This is true of both fixed and variable rate loans. Ask to see a break down of all the charges so you can intelligently compare the total cost of your loan. A mortgage is a long term investment. It pays to take the time to understand all your options.
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