Home Mortgage Help: Fixed and Variable Rates
View PDF | Print View
by: marciafreeman
Total views: 101
Word Count: 549
When you purchase a home for the first time, one of the most important things you will have to figure out is whether a fixed rate or adjustable rate mortgage (ARM) is best for you. Before knowing which is best for you, however, you need to be aware of how each one works.
Fixed Rate Home Mortgage
A fixed rate mortgage has an interest rate that does not change. This interest rate will not change during the entire length of the loan, and will not be affected by changes in others interest rates. Many new buyers decide to go with a fixed rate home mortgage, since these mortgages make it easier to plan for the future. Because the interest rate on your home mortgage never changes, neither do your payments. This means that if you purchase a home for $175,000 at rate of 6.5% for 30 years, your monthly home mortgage payments will stay at $1106 (excluding any escrow costs), and never deviate during the course of the term.
There are pros and cons to singing up for a fixed rate home mortgage. Though you will always be able to predict your monthly home mortgage payments (except for any property taxes and homeowners insurance), your interest rates will generally be higher than with an adjustable rate mortgage. This is because banks are generally taking on more risk with fixed rate loans, and so charge you more for keeping a frozen rate for the duration of your home mortgage.
A Home Mortgage with Adjustable Rate Interest
An adjustable rate home mortgage is often called a floating rate, as your rate changes along with interest rate indexes. Typically, adjustable rate mortgages begin with a short period in which the rate is fixed (usually 3 to 10 years). When this length of time has passed, your interest rate will change at intervals which are decided ahead of time. At these adjustment periods the rate you pay will rise and fall along with whatever index your rate is tied to. Simply put, if rates go up, your home mortgage payments will go up as well.
Normally, an adjustable home mortgage rate will start off lower than a comparable fixed rate for a 30 year mortgage. But if interest rates go up, your payments will go up. To reduce some of that risk, many ARMs come with a rate cap, allowing your rates rise only a specified number of percentage points.
The key to choosing the right loan for you is knowing how long you will be in your home and understanding your tolerance for risk. If you plan to stay in your home only a few years, its possible for you to save money by choosing an adjustable rate home mortgage with a lower fixed rate for the first few years of the loan. Chances are, you will have left the house before your rates ever change. If you plan to stay in your home a long time and do not want to deal with changing interest rates, a fixed rate option might be best for you.
About the Author
More references on mortgage refinancing, browse this site I like.
Rating: Not yet rated