Fixed-Rate Versus Adjustable-Rate Mortgages

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Fixed-Rate Versus Adjustable-Rate Mortgages

Posted On : Oct-28-2011 | seen (218) times | Article Word Count : 1096 |

When you start shopping around for a mortgage, there will be lots of decisions to make. Which lender will you choose? Will you choose a special type of mortgage

When you start shopping around for a mortgage, there will be lots of decisions to make. Which lender will you choose? Will you choose a special type of mortgage, like an FHA? The biggest choice to make, though, is whether you’ll go with a fixed-rate mortgage or an adjustable-rate mortgage. The one you choose will make all the difference in what your mortgage will look like and how you’ll pay it off over the next fifteen or thirty years.

What is a Fixed-Rate Mortgage?
It’s pretty simple: a fixed-rate mortgage is a mortgage with a fixed rate. When you take out your mortgage, you will, at some point in the process, lock in your rate. You may wait around for a few days to do this so that you will hopefully get the best possible mortgage rate. Once you’ve locked in that rate, it will stay the same, no matter how high mortgage rates get in the following years.

This type of mortgage is generally better if you can make the full mortgage payment every month from the beginning of your loan and if you’re looking for stability. Unless you refinance, your payment will always be the same, so you know what you have to deal with.

You can normally choose between fifteen-year and thirty-year terms on these mortgages. Each option has its advantages and disadvantages, but that’s information for another article!

What is an Adjustable-Rate Mortgage?
The adjustable-rate mortgage, or ARM, is a bit more complex and difficult to understand. However, it can still sometimes present a good option for borrowers looking for low payments when they first purchase a home. Basically, when you sign up for an ARM, you lock in one interest rate for a set period of time – from one month to ten years. After that time period is up, the interest rate will change according to certain benchmarks and certain intervals.

The most popular ARM right now is the 5/1. This means that for the first five years, you’ll lock in a low interest rate, therefore having low monthly payments. After the five years is up, your interest rate will change based on a set index, and it will change every year thereafter until it hits its cap.

The advantage of an ARM is that you can handle a bigger house at the beginning because your payments will be lower, especially if interest rates in general are quite high. You need to be prepared, though, for the interest rates to jump and to make your monthly payments rise by quite a bit after your lock in period is done.

When high interest rates are a problem, an ARM can be a good way for a family who wants to pay down a loan early to get started. You can lock in a low interest rate for up to ten years. If you choose, you can use that first ten years to make a few extra payments that will lower your principle. By the time your principle is quite a bit lower, even a jump in your interest rates won’t make your payment totally unbearable.

If you decide to apply for an ARM, you need to look at the ways that you’re protected in your loan’s contract. Get familiar with the rate caps to which nearly all these loans are subject. For many, the lender can’t increase your interest rate by more than a certain percentage in one period, usually a year. Other mortgages like this have lifetime caps, meaning they can only go up by a certain percentage over the life of the loan. Similar to this is the payment cap, which states that your payment can never be over x-amount of dollars over the life of your loan.

Choosing Between a Fixed-Rate Mortgage and an ARM
Making the choice between a fixed-rate mortgage and an ARM can be tough, especially if you’re a first-time homebuyer. Here are some things to look at that may help you choose:

1. What are overall interest rates like? If the economy in general is seeing very low interest rates, you may be better off locking in a fixed rate that’s pretty good. If the interest rates are incredibly high, on the other hand, an ARM might be what you need to start homeownership.

2. Where are the interest rates going? Predicting exactly what interest rates are going to do is like trying to predict exactly what the stock market is going to do. It doesn’t happen! There are, though, experts out there who can help you get a feel for whether you’re buying in a rising interest or falling interest environment. If the interest rates are rising, a fixed-rate mortgage is generally a better option. If they’re falling, an ARM can let you easily take advantage of that without having to worry about refinancing later on.

3. How long are you going to stay in your home? An adjustable-rate mortgage can be a good idea if you’re not staying in your home very long. You can make low payments while you’re there, and then dump the house when you’re ready to move on. A fixed-rate mortgage can be a better idea if you’re planning to stay in a home for a long time.

4. How much house can you afford? Because of their lower initial interest rates, ARMs typically allow people to buy larger homes than they would be able to with fixed-rate mortgages. One thing you can do is run the numbers for the possible payments for your ARM. If interest rates rise enough that your mortgage hits its cap, how much will your payments go up each year and in total? If you think you could still afford the payments at their highest point, an ARM can be a good way to get a little more house for your money.

5. How much do you know about mortgages? One of the biggest advantages of ARMs is that they can be customized for individual borrowers. One of their biggest disadvantages, though, is that they are difficult to understand and make it easy for less-than-scrupulous lenders to trap homeowners into mortgages they can’t afford. Fixed-rate mortgages, on the other hand, are simplicity itself. If you think you want to try an ARM, make sure you get a lot of information and read the contract very carefully. If you don’t understand something, ask, and if you can’t get straight answers, switch to a fixed-rate mortgage or another lender.

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<h1>Fixed-Rate Versus Adjustable-Rate Mortgages</h1> Author: <a href='http://www.articleseen.com/profile_Mortgage.aspx'>Mortgage</a> When you start shopping around for a mortgage, there will be lots of decisions to make. Which lender will you choose? Will you choose a special type of mortgage, like an FHA? The biggest choice to make, though, is whether you’ll go with a fixed-rate mortgage or an adjustable-rate mortgage. The one you choose will make all the difference in what your mortgage will look like and how you’ll pay it off over the next fifteen or thirty years.

What is a Fixed-Rate Mortgage?
It’s pretty simple: a fixed-rate mortgage is a mortgage with a fixed rate. When you take out your mortgage, you will, at some point in the process, lock in your rate. You may wait around for a few days to do this so that you will hopefully get the best possible mortgage rate. Once you’ve locked in that rate, it will stay the same, no matter how high mortgage rates get in the following years.

This type of mortgage is generally better if you can make the full mortgage payment every month from the beginning of your loan and if you’re looking for stability. Unless you refinance, your payment will always be the same, so you know what you have to deal with.

You can normally choose between fifteen-year and thirty-year terms on these mortgages. Each option has its advantages and disadvantages, but that’s information for another article!

What is an Adjustable-Rate Mortgage?
The adjustable-rate mortgage, or ARM, is a bit more complex and difficult to understand. However, it can still sometimes present a good option for borrowers looking for low payments when they first purchase a home. Basically, when you sign up for an ARM, you lock in one interest rate for a set period of time – from one month to ten years. After that time period is up, the interest rate will change according to certain benchmarks and certain intervals.

The most popular ARM right now is the 5/1. This means that for the first five years, you’ll lock in a low interest rate, therefore having low monthly payments. After the five years is up, your interest rate will change based on a set index, and it will change every year thereafter until it hits its cap.

The advantage of an ARM is that you can handle a bigger house at the beginning because your payments will be lower, especially if interest rates in general are quite high. You need to be prepared, though, for the interest rates to jump and to make your monthly payments rise by quite a bit after your lock in period is done.

When high interest rates are a problem, an ARM can be a good way for a family who wants to pay down a loan early to get started. You can lock in a low interest rate for up to ten years. If you choose, you can use that first ten years to make a few extra payments that will lower your principle. By the time your principle is quite a bit lower, even a jump in your interest rates won’t make your payment totally unbearable.

If you decide to apply for an ARM, you need to look at the ways that you’re protected in your loan’s contract. Get familiar with the rate caps to which nearly all these loans are subject. For many, the lender can’t increase your interest rate by more than a certain percentage in one period, usually a year. Other mortgages like this have lifetime caps, meaning they can only go up by a certain percentage over the life of the loan. Similar to this is the payment cap, which states that your payment can never be over x-amount of dollars over the life of your loan.

Choosing Between a Fixed-Rate Mortgage and an ARM 
Making the choice between a fixed-rate mortgage and an ARM can be tough, especially if you’re a first-time homebuyer. Here are some things to look at that may help you choose:

1. What are overall interest rates like? If the economy in general is seeing very low interest rates, you may be better off locking in a fixed rate that’s pretty good. If the interest rates are incredibly high, on the other hand, an ARM might be what you need to start homeownership.

2. Where are the interest rates going? Predicting exactly what interest rates are going to do is like trying to predict exactly what the stock market is going to do. It doesn’t happen! There are, though, experts out there who can help you get a feel for whether you’re buying in a rising interest or falling interest environment. If the interest rates are rising, a fixed-rate mortgage is generally a better option. If they’re falling, an ARM can let you easily take advantage of that without having to worry about refinancing later on.

3. How long are you going to stay in your home? An adjustable-rate mortgage can be a good idea if you’re not staying in your home very long. You can make low payments while you’re there, and then dump the house when you’re ready to move on. A fixed-rate mortgage can be a better idea if you’re planning to stay in a home for a long time.

4. How much house can you afford? Because of their lower initial interest rates, ARMs typically allow people to buy larger homes than they would be able to with fixed-rate mortgages. One thing you can do is run the numbers for the possible payments for your ARM. If interest rates rise enough that your mortgage hits its cap, how much will your payments go up each year and in total? If you think you could still afford the payments at their highest point, an ARM can be a good way to get a little more house for your money.

5. How much do you know about mortgages? One of the biggest advantages of ARMs is that they can be customized for individual borrowers. One of their biggest disadvantages, though, is that they are difficult to understand and make it easy for less-than-scrupulous lenders to trap homeowners into mortgages they can’t afford. Fixed-rate mortgages, on the other hand, are simplicity itself. If you think you want to try an ARM, make sure you get a lot of information and read the contract very carefully. If you don’t understand something, ask, and if you can’t get straight answers, switch to a fixed-rate mortgage or another lender.About the Author: <a rel="nofollow" href=http://www.bankmode.com>Mortgage Loans</a> Article Source: <a href='http://www.articleseen.com/Article_Fixed-Rate-Versus-Adjustable-Rate-Mortgages_97389.aspx'> http://www.articleseen.com/Article_Fixed-Rate Versus Adjustable-Rate Mortgages_97389.aspx</a>

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