How to Compare Fixed Rate Mortgages and Adjustable Rate
Mortgages
by Chileshe Mwape
Published on this site: July 19th, 2005 - See
more articles from this month...
There are many types of mortgages, and the more you know about
them before you start, the better. To compare one Adjustable
Rate Mortgage with another or with a fixed-rate mortgage,
you need to know about indexes, margins, discounts, caps,
negative amortization, and convertibility. You need to consider
the maximum amount your monthly payment could increase. Most
important, you need to compare what might happen to your mortgage
costs with your future ability to pay.
FIXED RATE MORTGAGES
In a fixed-rate mortgage, your interest rate stays the same
for the term of the mortgage. The main advantage of a fixed-rate
mortgage is that you always know exactly how much your mortgage
payment will be, and you can plan for it.
Benefits and Advantages:
- Low rates for the full term of your mortgage
- Security of a fixed monthly payment for the life of you
loan, regardless of fluctuations in interest rates
- More stability may give you peace-of-mind
Disadvantages
- Higher initial monthly payments compared to those of adjustable
rate mortgages
- Less flexibility
ADJUSTABLE RATE MORTGAGE (ARM).
With this kind of mortgage, your interest rate and monthly
payments usually start lower than a fixed-rate mortgage. But
your rate and payment can change either up or down, as often
as once or twice a year. The adjustment is tied to a financial
index. Throughout the life of that loan, the principal and
interest payment will adjust periodically based on fluctuations
in the interest rate.
Benefits and advantages:
- Lower Initial payments due to lower beginning interest
rate
- Ability to qualify for a higher loan amount due to lower
initial
interest rates
- Lower interest payments if the interest rate drops over
time
- Interest rate caps limit the maximum interest payment
allowed for
the loan
Disadvantages
- Your future monthly payment is uncertain.
- Initial lower interest rate and monthly payments are
temporary and apply to the first adjustment period. Usually,
the interest rate will rise after the initial adjustment
period.
- Higher interest payments if the interest rate rises over
time
SUMMARY
A Fixed Rate mortgage will offer you the security of knowing
that your mortgage interest rate will not change during the
term of your fixed rate. The advantage of an Adjustable Rate
Mortgage is that you may be able to afford a more expensive
home because your initial interest rate will be lower. A Fixed-Rate
Mortgage applies the same interest rate toward monthly loan
payments for the life of the loan. Fixed-rate mortgages are
more straightforward and easier to understand than ARMs. They
are more secure for the buyer and they are very popular with
first-time home buyers. Since the risk to the lender is higher,
fixed-rate mortgages generally have higher interest rates
than ARMs. A fixed rate mortgage is ideal for anyone who likes
to budget monthly expenses and plans to keep their home for
several years.
A more detailed version of this article including a glossary
of terms is available at: http://www.us-banks.org/archives/1970
Chileshe Mwape writes for The US Banks Guide: http://www.us-banks.org/
Find informative articles and news stories about banking and
finance.
|
