 | Types of Mortgage Loans, Fixed Rate or Adjustable Rate Mortgage |
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Types of Mortgage Loans: Fixed Interest Rate and Adjustable Rate Mortgage (ARM)
Before you buy a home for the first time, you should know the different types of mortgage loans available to you and which option might be best to consider for your situation.
The two main types or mortgages are called a fixed rate mortgage and an adjustable rate mortgage. What are the differences between fixed and adjustable rates? How should you decide which rate is right for you? It all depends on your financial situation and how long you plan to own the house before selling.
A fixed rate mortgage is a mortgage loan with an interest rate that is defined prior to the initial signing of the loan.
This initial rate remains the same throughout the lifespan of the mortgage loan. Fixed rates ensure your interest rate does not rise with lending rates. In the event of the lending rates increasing the home owner is paying an interest lower than the current market interest rate. If, however, the market rate decreases, then the home owner can not take advantage of the lower interest rates without refinancing. The term of the loan, or the length of the mortgage loan is also important to consider. If you choose to pay off the mortgage loan in 15 years as opposed to 30 years, you will have larger monthly payments. However, with a 15 year mortgage loan you end up paying less money in interest. Due to the significant savings over the long run, it is recommended to apply for a shorter loan term, if you are able to afford it.
An adjustable rate mortgage follows the current market interest rates. An adjustable rate mortgage is also referred to as an ARM loan. What an adjustable rate mortgage means is, instead of paying the initial rate for the life of the loan, the rate is adjusted monthly to match the current market rates. For example, if the lending interest rates decrease, you will end up paying less each month and saving money. However, the main disadvantage with this type of loan is if the rates make significant increase, your mortgage payment will jump. With adjustable rate mortgages, in many cases, people have to foreclose their home because they simply cannot afford the new, higher monthly mortgage payments. Adjustable rate mortgages would be the best option if you will be selling your house in the near future.
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