Fixed Rate or Adjustable?
Fixed rate or adjustable rate mortgages are two of the most popular choices of mortgage loans that most lenders offer you. Deciding which loan makes the most sense for you, depends on how long you plan to live in the home, your financial situation, the current interest rates, and your tolerance for risk.
Understanding the benefits and risks of each loan will help you decide if a fixed rate or adjustable rate loan will work best for you.
With a fixed rate home loan, your monthly mortgage payment of principal and interest never change for the life of your loan. The stability of a fixed rate home loan is the reason why it is the most popular way to finance a home today.
Fixed rate home loans are available as 30, 20, 15 and 10 year loans. You may have even heard of the new 40 year loans. Fixed rate home loans make sense if you answer yes to the following:
Some fixed rate home loans can be converted into biweekly mortgages which will shorten the life of your loan. By paying your monthly mortgage payment every two weeks, you make one extra payment a year for a total of 26 payments.
You end up paying less interest on your loan and build equity faster in your home. It makes sense to finance a home with a fixed rate home loan only if you plan to live in your home for 5 years or longer.
That is because in the early amortization period of a fixed rate home loan, the biggest percentage of your monthly mortgage payment is applied toward interest, and only a small amount is applied toward the principal. That will gradually reverse itself as the loan ages.
Adjustable Rate Loans
Adjustable rate loans make sense if you are going to live in your home less than five years. Also, adjustable rate loans can be easier to qualify for and that may make it easier for you to initially get into a home.
You can always refinance to a fixed rate home loan if your future income is going to increase. Adjustable rate loans start at an introductory rate which is a lower interest rate than a fixed rate home loan.
The low introductory rate makes your monthly mortgage payment lower than a fixed rate home loan. But these loans carry a little more risk because the trade-off for the lower payments of an adjustable rate loan is the uncertainty of the amount of your monthly mortgage payment.
However, most adjustable rate loans have cap protections so your monthly mortgage payment doesn't go up too quickly. Adjustable rate loans make sense if you answer yes to the following:
Everyone has different circumstances and only you can decide if the risks or advantages are in your best interests. These tips should help you decide if a fixed rate home loan or adjustable rate loan will work best for you.
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