Fixed rate or adjustable rate mortgages are two choices of mortgage loans that most lenders will offer you. Your financial situation, how long you plan to live in the home, the current interest rates, and what risks you are willing to take is the best way to decide which loan makes the most sense for you.
Understanding the benefits as well as the risks of each loan will help when deciding if a fixed rate or adjustable rate loan works best for you.
Fixed Rate Home Loan
A fixed rate home loan offers you monthly principal and interest mortgage payments that never change for the life of your loan. A Fixed rate home loan is the most stable option with very little risk. That is 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 and they make sense if you answer yes to the following:
Some fixed rate home loans can be converted into biweekly mortgages which 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 pay less interest on your loan and build equity faster.
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. Only a small amount is applied toward the principal but that will gradually reverse itself as the loan ages.
Adjustable Rate Loans
Adjustable rate loans make sense if you plan to live in your home less than five years. Adjustable rate loans can also 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 later if your future income is going to increase.
Adjustable rate loans start at a low introductory interest rate which is a lower than a fixed rate home loan. The low introductory rate makes your monthly mortgage payment lower than a fixed rate home loan.
But the trade-off for 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 right for you. These tips should help with your decision if a fixed rate home loan or adjustable rate loan works best for you.
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