Fixed-Rate vs. Adjustable-Rate Home Mortgages
A home is where the heart is. If you want to build your own family, you will need a home of your own. However, owning a home is not that easy. If you are very rich with lots of money saved; it is easy for you to own a house because you can pay the total price of the house you want in cash. However, if you haven’t saved enough money yet, you can still go for a house by financing it through a mortgage loan.
Loan given by a bank or any lending institution so that a person can afford to purchase a house is called mortgage loan. When a mortgage loan is given to a person, he is allowed to use the bank’s money to purchase a home of his choice. The bank in turn will earn by adding interest on the total amount of cash value, known as the principal, borrowed by the person. The interest added to the loan will depend on the current economic indicators.
There are basically two types of home mortgages which a person can choose to purchase his/her first home or for a home refinance. These are the fixed-rate mortgage and the adjustable-rate mortgages. Each type of mortgage has its own advantages and disadvantages. It is advisable to understand the differences between these two types of mortgages so that you can choose the mortgage that will best suit your needs.
The Fixed-Rate Home Mortgage: If you have tight budget, the fixed-rate home mortgage is ideal for you. Fixed-rate home mortgages are charged with a set rate of interest which doesn’t change throughout the term of the loan. The advantage of a fixed-rate home mortgage is that the total amount that you have to pay will remain the same. The payments you will make consist primarily of interest payments during the initial years of the term. During the later part of the term, the payments will go towards the reduction of your principal.
Another advantage which is actually considered as the main advantage of a fixed-rate mortgage is that the person who was granted the loan is protected from any sudden and potentially significant increase in monthly mortgage payments due to the rise of interest rates. Economies of even the most developed countries such as the US are very volatile and can change dramatically at any moment. When this happens, inflation may occur which will cause an increase in the interest rates charged by banks on their loans. A fixed-rate mortgage protects a loan borrower from these changes. This means that whatever payments computed through a mortgage calculator will not change throughout the loan’s term.
The Adjustable-Rate Home Mortgage: An adjustable-rate home mortgage (ARM) has interest rates that vary over time. At the beginning, the ARM offers an interest rate which is lower than that offered by fixed-rate mortgages. However, this rate is only for a specific part of the total loan term. As the term progresses, the interest will keep increasing until it surpasses the going rate for fixed-rate mortgages.
The low interest rate of the ARM will only remain constant only for a fixed period. After this period is reached, the interest rates are adjusted at a pre-arranged frequency.
Adjusted-rate mortgages can be very difficult to understand. This is because of the multiple factors affecting interest rates being charged on the loan. The adjustments of the interest rates depend on different adjustment indexes such as the interest rate on certificates of deposit, the treasury bills or the LIBOR rate. However, a person who wants to apply for an ARM may negotiate with the lending institution for caps and ceilings on the interest charges on the loan. Ceiling refers to the highest amount of interest that can be charged on the loan.
ARM is an ideal option for most people because they offer lower initial payments and allow them to qualify for larger loans. Not only that. In an economy with a falling interest rate, the person with an ARM will be able to enjoy lower interest rates as the loan term progresses. However, when interest rates rise due to poor economic indexers, a person may find himself paying a significantly higher monthly payment than what he bargained for.
Article by John Hoots of Chicago, who is a specialist in mortgages. For more information on realty mortgage Chicago, visit his site today.
Discussion Area - Leave a Comment