Fixed-Rate or Adjustable-Rate Mortgage
While opting for a mortgage loan you will also have to make choice as to whether
to take out a fixed-rate mortgage or an adjustable loan mortgage.
It is easy to comprehend what fixed rate mortgage means as with these kinds of
mortgage loans, the rate of interest does not fluctuate it stays fixed
throughout the life of the loan. One has to do a proper market research while
deciding which one to go with and if the rate of interest in the market is low,
you should opt for a fixed rate mortgage. If the market rate goes up in future,
you are safe. However, if you choose to go with adjustable rate mortgage loan
you might be paying higher today but will pay lower tomorrow and vice versa
depending upon the market.
Adjustable Rate Mortgage Loans
An adjustable loan mortgage is also not without limits and they have a cap
which lenders can increase only during the adjustment period. This means that
lenders cannot increase more than a certain percentage within that particular
period. This can lead to a loan rate increasing to over three times it original
amount after a number of adjustments in interest rate is made.
Fixed rate mortgages is the most popular choice as they help you with your
finances since you will know each month how much you will be paying as it never
change. If by chance there is a sharp drop in rates of interest, you can always
go for refinancing your loan.
However, there are many people inclined towards ARM as well for a number of
reasons. ARM have low rates of interest initially and due to this many persons
go for it as they might not have enough funds now but can assume to gain a
better financial ground in time to come. Few years later they can switch to FRM
or get refinance through it after enjoying the benefits of low rates of ARM.
There are many points one need to look at carefully before going in to select a
loan but basically two factors should be considered closely:
1. Are you ok with taking risks?
2. What is the span of time you plan to stay in that particular house?
If you do not plan to be in the house for long then an adjustable rate mortgage
would be better because of the lower initial rates. If you are likely to be in
the house for a very long time then a fixed rate mortgage is best.
There are different opinions as to which is one is safer between ARM and FRM
but technically FRM is much more risk free but in ARM one also gets the benefit
of low rates. This can confuse you a lot and that is why it is important that
you sort out your priorities and then continue the process of deciding on any
loan type you choose.
