Tips On Choosing Either A Fixed Rate Or An Adjustable Rate Mortgage

By Author: Scott Archer
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The basic difference between a Fixed Rate Mortgage and an Adjustable Rate Mortgage is the interest rate at which you will repay the loan. An interest rate determines how much of your monthly mortgage loan installments are designated for interest, and how much goes to repay the principal of the loan. The rate remains unchanged on a Fixed rate Mortgage, but it varies with an Adjustable rate Mortgage. This can be a huge difference month to month, and can add substantially to the amount you pay over 15 or 30 years for your home.

Fixed Rate Mortgages:
These are mortgages created and provided by both the FHA/HUD and the private banking sector. Fixed Rate Mortgages are often mortgage loans, based on a 15-year or a 30-year term, and come with a monthly interest rate that stays the same throughout the life of the loan. This means you pay the same amount to the mortgage lender every month for the life of the loan.

Fixed Rate Mortgages may be a reasonable solution for homeowners with 10% or more as their down payment but do not have a substantial monthly cash flow. Generally with a Fixed Rate Mortgage, you will ...
... be limited in the amount you can borrow, versus with a variable or interest only mortgage loan. If you have a solid credit history and solid work history and plan to use the home as your primary residence for 5 years or longer, the Fixed Rate Mortgage may also be a good option for you.

Adjustable Rate Mortgages (ARMs):
ARMs are more complicated in creation than the Fixed Rate Mortgage. Adjustable Rate Mortgages are just that, a loan whereby your mortgage interest rate may change either up or down, generally in relation with an index, bond, or the current mortgage interest rates available. Typically this change happens a few times a year. The formulas used to determine interest rates for ARMs on any given day are derived from the rate at which Treasury Bills are bought on the primary Treasury Bond Market.

ARMs generally offer both an initial lower interest rate and payment and are a good option for buyers who do not have the income to afford a large monthly payment initially, for a buyer who does not intend to be in the home for more than 2 years, and lastly for Homebuyers who want to purchase the property as an investment,

Many Adjustable rate Mortgages are structured so that for the first 5 years of the loan, the rate is low, sometimes lower than one you might qualify for with a Fixed rate loan. This allows a young couple or single person on a budget to have a lower monthly payment during the first few years.

Generally in the initial time period, the ARM rate usually pays mostly toward the interest in the loan, not the principal (the actual value of the home). However, after the 3-7 years (designated by the ARM type) the rate can increase substantially, in order to begin applying more payment to the principal. This can be problematic you, the homeowner, is on a fixed budget, and are suddenly hit with a mortgage payment that is several hundreds dollars more than you can afford.

Some Govt Loan programs such as FHA and VA offer streamline refinance options, which may be easier for you to refinance into a fixed rate mortgage. If you have an FHA or a private ARM, you have the option of refinancing the loan with another FHA lender, or bank in order to secure a lower ARM than the one you are currently paying.

Comparing quotes online are a great way to find a loan best for you and for your situation.