The Difference Between Fixed Rate and Variable Rate Home Mortgages
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by: marciafreeman
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Now that interest rates are hitting record lows, applying for a home mortgage may be an excellent idea. If this is your first time buying a home, the different types of home mortgage on the market might be confusing. Here is a guide to the two most common types of home mortgage, fixed rate and adjustable rate mortgages.
Fixed rate mortgages have a set interest rate and a fixed payment for the life of the loan. Whatever the rate when you close the loan, that is the rate you will have until you sell the property, refinance, or pay off the home mortgage completely. Lenders usually charge marginally higher interest rates for fixed rate home mortgages as security against times when interest rates rise. This slightly higher interest rate is a premium you pay for the security of a fixed rate.
On the other hand, the interest rate for adjustable rate mortgages "adjusts" as national interest rates rise and fall. When the prime rate is high, your mortgage interest rate increases; when the prime rate is low, your mortgage rate drops. Your monthly payments rise and fall accordingly. Because banks have less risk with adjustable rate mortgages, they set the interest rate on this type of mortgage lower than they do for fixed rate loans. They also offer a grace period, typically 36 months to seven years, during which your interest rate does not fluctuate and is locked at an appealingly low rate.
Which type of loan is best for you? Avoid immediately being swayed by the lower rates offered by adjustable rate loans. Consider how long you plan to keep your house and whether rates are likely to go any lower. If interest rates are at a record high when you buy your house, taking out an adjustable rate mortgage is a sensible idea, since your rate is likely to improve. If you plan to resell your house within the grace period of an adjustable rate mortgage, then opting for an adjustable rate mortgage would be an economical way to get a low cost, short term loan. However, if you plan to stay in your house for a long time and national interest rates are low, then "locking in" a lower interest rate with a fixed rate mortgage may be your best move.
Consider not only your own financial condition, but national trends in interest rates, when you choose a home mortgage. Both types of home mortgage loan are excellent ideas at the right time. Related Loans Loans
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