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Adjustable Mortgages and Fixed Rate Mortgages - What is the Difference?

 


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When you're buying a home, finding the right mortgage is just as important as finding the right home. The first decision you will need to make is the type of interest rates you will be borrowing on. This article will take you through the basics of adjustable and fix rates.

Most people either choose a fixed rate or an adjustable rate mortgage. But before making an important commitment, you should learn the pros and cons of both.

  • Adjustable rate Mortgages

    Adjustable rate mortgages generally offer you a fixed rate for a specific period, and then afterward the interest rate becomes adjustable. This is a good option for those that don't have a strong credit rating. At the same time it still allows you to budget for the duration of the fixed rates, offering you stability even for just a while. Most common adjustable mortgage has fixed rates for one, three or five years. If you can get a five year fixed rate mortgage, that would be a good deal

    If the interest rates are low, then it would be good news for those who intend to sell their homes in five years. You can reap the benefits of a fixed rate mortgage without actually having one. As the interest rates rises and falls with the market, if the interest rates fall as your fixed period is coming to the end, then that would be good news for you.

    However if interest rates rise then it could be quite a burden on you, monthly payments can rise without advance warning.

    After the fixed period is over, the loan can rise as much as 6%, and no one would want a loan payment with 12% interest. Monthly payments can snowball out of control unless you refinance the loan.

  • Fixed Rate Mortgages

    Fixed rate mortgages have fixed interest rates for the entire duration of the loan. Even if the rates increase in future you will still pay the same interest rate. In a good market, an interest rate of 5.5% is great, regardless of market changes your monthly payments will not change.

    Fixed rate mortgages do have a downside. If you happen to take on the loan when interest rates are high, you could be locked into a high interest mortgage for the entire duration of the loan. But there is a way out: you could refinance your loan when the interest rate is lower. Although one downside to refinancing is that the process could be quite time consuming.

    Mortgages are not easy, there are several factors to consider before deciding on a type that is the most suitable. It is important for you to do your research on adjustable and fixed rate mortgages and current market conditions.

    To get more free advice on mortgage issues, please visit Invest Money Stocks .

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