Fixed rate vs Adjustable rate mortgage comparison

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By: Amy
on 30th Oct,2013

When it comes to getting and paying off a mortgage there is a lot on the line.
Fixed rate vs Adjustable rate mortgage comparison

When it comes to getting and paying off a mortgage there is a lot on the line. Especially if you already own your home free and clear, taking out a second mortgage can be a risk unless you are sure you can pay back the loan. Generally speaking, there are two basic types of mortgage plans you can get- the fixed or adjustable rate mortgage. The rate mentioned is the interest rate that you will pay while you have the loan and each of these types handles interest in a different way.

Fixed Rate

A fixed-rate mortgage is set up so that the interest does not change throughout the life of the loan. The amount that is applied to the principal or to the interest can change with each month, but the same amount will be due each and every month. Think of it like this, you pay 500 dollar a month in payment, one month only 100 may go towards the principal and the rest is interest and later on the payment will still be 500 but now 300 may go towards the principal and only 200 for interest.

The main advantage to these loan types is that you know exactly how much you will have to pay each and every month for the life of the loan. It also protects you from sudden spikes in the interest rates. However the downsides are that you get no introductory interest rate and when rates are high, getting the loan in the first place can be a challenge since it is hard to afford. It is also important to note here that your credit score can also impact your ability to get a fixed rate loan, so it is important to perform a check on your credit report and score so you know how lenders will see you when you walk into their office.

Adjustable Rate

The interest rate that you would end up paying for an adjustable-rate mortgage will flux and change over time. They often are given an introductory rate that is lower than the current rates for loans. The introductory rates can last from a year or less to more than ten years, depending on the total length of the loan. These types of mortgages are attractive since they offer lower than average rates at the start of the loan and are easier to qualify for. They also hold the promise of getting the loan paid off faster because each additional monthly payment can go to the principal instead of the high interest. They can, however, pose some significant downsides. The biggest is that once the introductory time is over the interest rate will rise whenever the rates rise for similar loans. Additionally, if your loan was a big one that has a 20, 30, or higher term you can end up paying double or triple the starting interest rate or more by the time the loan is paid off. As with the fixed rate, your credit can come into play, so view your credit scores before you head to the bank to talk about the loan and you can get an idea of what loan you might be offered.

Which is Right for You?

There are some key questions you need to ask yourself in order to determine which loan type is best for you:

• How big of a mortgage loan can you afford?

• Could you keep paying on an adjustable rate if the rates suddenly went up?

• What have the current interest rate trends been- up or down or stable?

If rates are low and maintaining or if there has been a downward trend in interest rates then an adjustable might help save you money- so long as you can pay the loan off as quickly as possible to avoid having a large principal when the rates go back up. If rates have been climbing or have been doing frequent ups and downs a fixed rate might be the better choice so you know how much you will be paying each and every month regardless of rate fluxes.

When it comes down to choosing a mortgage, whether a first or second one, you need to remember these important points. Your individual financial needs and limits as well as the current trends in the market must be carefully considered. Regardless of whether you select a fixed rate or adjustable rate mortgage, choosing carefully will help you avoid costly mistakes down the road.

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