Docstoc

Fixed Rate Mortgage vs. Adjustable Rate Mortgage

Document Sample
Fixed Rate Mortgage vs. Adjustable Rate Mortgage Powered By Docstoc
					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.

				
DOCUMENT INFO