Fixed Rate Mortgage Vs Adjustable Rate Mortgage

Fixed Rate Mortgage Vs Adjustable Rate Mortgage



Fixed Rate Mortgage vs .​
Adjustable Rate Mortgage
The most basic distinction between types of​ mortgages that are available when you're looking to​ finance the​ purchase of​ a​ new home is​ how the​ interest rate is​ determined .​
Essentially,​ there are two types of​ mortgages - fixed rate mortgage and an​ adjustable rate mortgage .​
If you​ choose a​ fixed rate mortgage,​ the​ rate of​ interest that you​ are paying on​ your mortgage remains the​ same throughout the​ life of​ the​ loan no matter what general interest rates are doing .​
In an​ adjustable rate mortgage,​ the​ interest rate is​ periodically adjusted according to​ an​ index that rises and falls with the​ economic times .​
There are advantages and disadvantages to​ either,​ and no easy answer to​ 'which is​ better,​ a​ fixed rate mortgage or​ an​ adjustable rate mortgage?

The main advantage to​ a​ fixed rate mortgage is​ stability .​
Since the​ interest rate remains the​ same over the​ entire course of​ the​ loan,​ your monthly payment is​ predictable .​
You can count on​ your monthly mortgage payment to​ be the​ same amount each month .​
On the​ minus side,​ because the​ lending institution gives up the​ chance to​ raise interest rates if​ the​ general interest rates rise,​ the​ interest on​ a​ fixed rate mortgage is​ likely to​ be higher than that of​ an​ adjustable rate mortgage.

A fixed rate mortgage loan makes the​ most sense for those that are going to​ settle into their home for many years .​
While the​ initial payments may be larger than with an​ adjustable rate mortgage,​ stretching the​ payments over a​ longer period of​ time can minimize the​ effect on​ your budget.

An adjustable rate is​ one that is​ adjusted periodically to​ take into account the​ rise or​ fall of​ standard interest rates .​
Generally,​ the​ adjustable term is​ annual - in​ other words,​ once a​ year the​ lending company has the​ right to​ adjust the​ interest rate on​ your mortgage in​ accordance with a​ chosen index .​
While adjustable rate mortgages make the​ most sense in​ a​ situation where interest rates are dropping,​ though it's dangerous to​ count on​ a​ continued drop in​ interest rates.

Lenders often offer adjustable rate mortgages with a​ very low first year 'teaser' interest rate .​
After the​ first year,​ though,​ the​ interest rate on​ your mortgage can increase by leaps and bounds .​
Even so,​ there are limits to​ how much an​ adjustable rate can actually adjust .​
This is​ dependent on​ the​ index chosen and the​ terms of​ the​ loan to​ which you​ agree .​
You may accept a​ loan with a​ 2.3% one year adjustable rate,​ for instance,​ that becomes a​ 4.1% adjustable rate mortgage on​ the​ first adjustment period.

Finally,​ there's a​ new kind of​ loan in​ town .​
a​ hybrid between adjustable rate mortgages and fixed rate mortgages,​ they're known as​ 'delayed adjustable' mortgages .​
Essentially,​ you​ lock in​ a​ fixed rate of​ interest for a​ number of​ years - say 3 or​ 7 or​ 10 .​
At the​ end of​ that period,​ the​ loan becomes a​ 1 year adjustable rate mortgage according to​ terms set out in​ the​ agreement you​ sign with the​ mortgage or​ financial institution.




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