The Differences Between Fixed Rate and Adjustable Rates
The interest rate that you purchase your home at is possibly the most important step in the process of taking out a mortgage loan. Depending on the certain loan that you want, there are multiple steps before you can tell what type of rate is economically sound for you.
The first big decision is whether you would like a FRM or an ARM for your home loan, these are the two most common types of rates when it comes to home purchases. Read on for the differences between the two types of rates to help you make a more informed decision.
Fixed Rate Loans
Of course Fixed Rate home loans as the name implies will stay the same over the term of your loan, independent of the rise and fall of the national interest rates. Fixed rate home loans are generally used for only a few years, with a very low rate at first, and then a higher adjustable rate or a higher rate will replace the original agreement. Fixed Rate Loans are generally 30, 40, or 50 year terms.
Adjustable Rate Loans
Also known as variable rate loans or ARM mortgages, adjustable rate loans rise and fall in whenever there is a major change in the national interest rate and mortgage market. Variable rates were created to deal with small to medium sized loans, generally credit cards and personal loans.
With a variable rate it is difficult to predict exactly the amount you will pay for your mortgage, and the change can happen at any time. It can be very lucrative is selected correctly.
Pros and Cons of Fixed Rate Mortgages
- Offer protection against rises in national rates
- Harder to Qualify For
- Make Budgeting Easier
- More Expensive for the first part of the loan
- If Rates Fall you are locked at a higher rate and could pay more
- Some Fixed Rates are set very low at first, then adjust after 5 to 7 years
- Payment Options are usually set
Pros and Cons of Adjustable Rate Loans
- Lower interest rates can be acquired than with fixed rates mortgages
- Rates can be very low if the market is right
- Cheaper in the beginning of the term
- Variable Rates can rise to twice the original rate, or higher in some situations
- Unexpected Changes can put stress on finances
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