What Are Fixed Rate and Variable Rate Mortgage Loans
You need a mortgage loan when you decide to buy a house
. There are two options available for you. These are the adjustable rate home loan and fixed rate mortgages.
So which type of mortgage is best for you? You have to understand that the difference between these two mortgages is huge. So it is very important to understand fixed and adjustable mortgage loans so you can determine which one is a better deal for you.
Fixed Interest Mortgage Loans
Repayments for fixed interest mortgage loans are usually set for at least 15 years to a maximum of 30 years. As the name implies, the interest rate that you have to pay will never change throughout the lifetime of your loan. So if your loan stipulates that you will have to pay seven percent interest, this rate will remain constant until your final payment.
Most people are comfortable with a fixed interest rate loan because they are shielded from rate fluctuations. However, risks are also present if you take this type of mortgage. What if the rates suddenly decreased a month after you take out a fixed interest mortgage? Obviously, you will lose a lot if you experience this situation. If you waited a little longer, you could have enjoyed a much lower interest rate.
Your solution is to refinance your original mortgage. This is the best option but it may not work at all times. Your application for refinancing can be declined by the lenders due to several reasons. Furthermore, applying for a mortgage refinance is time consuming and tedious. Refinancing is not an easy process.
Adjustable Rate Mortgages
ARM or adjustable rate mortgages have interest rates that change over a period of time. In some cases, your rates could change annually or from month to month depending on existing market conditions. However, adjustable rate mortgage can offer many benefits but it is also a risky deal.
For one thing, you can save a lot if you have adjustable rate mortgage. Normally, the rates are lower for the first few years of your loan. This will give you the opportunity to save more money. If you take out an adjustable rate mortgage, you will enjoy initial lower payments compared to those who opted for fixed rate mortgage loans.
After the initial period, your interest rate will now depend on market trends. If the market rates go down, then your monthly payments will also go down. Unfortunately, you will pay more if the interest rates go up. Based on industry studies, experts found that a slight decrease in interest rates can benefit the homeowners. Unfortunately, the rates are not always low. There are times when the interest rates will be adjusted by at least 1 to 2 percentage points upwards. If this happens, then you have to pay more for the loan.
It is not a joke to get a mortgage loan. This is a long term commitment and you have to repay the loan within 15 to 30 years. So you need to choose carefully what type of mortgage would be most suitable for your situation.
What Are Fixed Rate and Variable Rate Mortgage Loans
By: Rob Blake
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