Choosing Between a Fixed and Variable Rate Home Mortgage
When buying your home, one of the first big decisions youll have to make is whether to go for a fixed rate or an adjustable rate mortgage (ARM). First, of course, you need a clear idea of what they are. Fixed Rate Home Mortgage A fixed rate mortgage has an interest rate that does not change. This interest rate will not change during the entire length of the loan, and will not be affected by changes in others interest rates. Many new buyers decide to go with a fixed rate home mortgage, since these mortgages make it easier to plan for the future. As the interest rates you are paying on your home mortgage are always the same, so are your mortgage payments. This means that if you purchase a home for $175,000 at rate of 6.5% for 30 years, your monthly home mortgage payments will stay at $1106 (excluding any escrow costs), and never deviate during the course of the term. There are upsides and downsides to going with a fixed rated home mortgage. While you will always be able to depend on a fixed mortgage payment (excluding property tax and insurance), you will typically have a higher interest rate than if you used an ARM. This is because banks are generally taking on more risk with fixed rate loans, and so charge you more for keeping a frozen rate for the duration of your home mortgage. A Home Mortgage with Adjustable Rate Interest An adjustable rate home mortgage (ARM) "floats" or fluctuates with changes in interest rates. Typically, adjustable rate mortgages begin with a short period in which the rate is fixed (usually 3 to 10 years). After that time, the rate will adjust at predetermined intervals. During a period of rate adjustment, your home mortgage rates will rise or fall depending on what is happening in the index your rate is connected to. To put it simply: if interest rates go down, your payment will go down also. Normally, an adjustable home mortgage rate will start off lower than a comparable fixed rate for a 30 year mortgage. But if interest rates go up, your payments will go up. Fortunately, many adjustable rate home mortgages come designed with a rate cap, which will limit the number of percentage points your rates can go up. The most important part of deciding on the best loan for you is having a thorough understanding of your acceptance of risk, as well as a plan for the amount of time you will own the home. If you plan to stay in your home only a few years, its possible for you to save money by choosing an adjustable rate home mortgage with a lower fixed rate for the first few years of the loan. Chances are, you will have left the house before your rates ever change. If you plan to stay in your home a long time and do not want to deal with changing interest rates, a fixed rate option might be best for you.
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