Fixed or Adjustable Rate Mortgage?

Fixed or Adjustable Rate Mortgage?
If you decided to apply for a mortgage, two choices that most lenders will offer you are fixed rate or adjustable rate mortgages. To make your decision on which one to apply for should depend on many factors, such as your financial situation, current interest rates, risks you are willing to take and the term you plan to live in your new home.

Both types of mortgage have their advantages and disadvantages, benefits and risks. Understanding every one of them will help you to decide which loan type is right for you.

Fixed rate home loan

Fixed rate home mortgage loan’s monthly principal and interest payments never change during the life of your loan. Nowadays fixed rate mortgage is the most popular way to finance a home due to its low rates and little risk. It is available as 30, 20, 15 and 10 year loan. If you plan to live in your home more than 5 years and don’t want to risk future monthly payment increases this option is probably right for you. Besides, it gives you the stability of fixed monthly mortgage payments.

In some cases you can turn your fixed rate loan into a biweekly mortgage. This will allow you to shorten the life of your loan, pay less interest and build equity faster. This is done by paying your monthly mortgage payment every two weeks, plus one extra payment a year to make total of 26 payments.

The thing about living in your home for more than 5 years is that during the early amortization period major part of your monthly payments is applied toward interest, not toward the principal. This will gradually reverse itself, but if you plan to move during the stated period you should consider adjustable rate home loan first.

Adjustable rate home loan

Adjustable rate mortgage has its own advantages. They are good when you plan to live in your home for less than five years and easier to qualify. In other words, an adjustable rate mortgage can help you faster get into your home. If your incomes will grow in future you can always refinance to a fixed rate home loan.

An adjustable rate loan starts at a lower interest rate than a similar fixed rate one does. That makes your monthly payments lower at the beginning, but the bad thing is that you never know exactly what your monthly payments are going to be in future. However, most adjustable rate loans have cap protections. This means, that your monthly payment can not go up too quickly.

Applying for an adjustable rate loan makes sense if you plan to move during a five year period, will be able to afford higher monthly payments if interest rates go up and/or think that interest rates will remain the same or decrease in future.

Since everyone has different situation you’re the only person who can decide which loan suites you the most. Carefully think of all benefits you get and all risks that you take before choosing a fixed rate or an adjustable rate loan.

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