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Adjustable Rate Mortgages vs Fixed Rate Mortgage

Should I Get An Adjustable or Fixed Rate Mortgage?

Purchasing a home can be a very exciting and yet stressful time for anyone. While you may be excited at the prospect of owning your own home, especially if it is your first home purchase, the idea of choosing between all of the many different types of mortgages may leave you feeling confused and apprehensive.  Two of the most common choices home buyers are faced with when shopping for a mortgage are a fixed rate and adjustable rate mortgage. The Fixed rate mortgage is the the most traditional type of home mortgage product.  

The fixed interest rate does not change throughout the life of your loan. There are numerous benefits that are  associated with this type of mortgage. One of the first benefits that come to mind is that if you are budget conscious, this type of mortgage will give you the peace of mind in knowing that your monthly mortgage amount and thereby your monthly mortgage expense will not change. With this mortgage it is easier to budget your financial obligations without being concerned about your mortgage payment changing or the uncertainty of what next months payment might be. 

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An adjustable rate home mortgage works differently. With this type of home loan you may be able to obtain an initial  lower interest rate than would be available with a fixed rate mortgage; however, the interest rate can vary and is not fixed. This means that your monthly payment and mortgage rate may change as interest rates or the index that your loan is based, ie Libor, changes. 

With an adjustable rate mortgage you may not be able to regularly plan your budget due to such fluctuations.  While at the outset this might seem like a bad thing, there are typically caps in adjustable rate mortgage that protect the borrower from just such an incident.

Adjustable Rate Mortgages vs. Fixed Rate Mortgages

One of the advantages of a fixed rate mortgage is that it allows you to start with a lower rate and even afford more of a home.  This may be the way to go if you believe that interest rates will remain low or if you believe that your work situation will improve. In addition if you do not think that you will be in your house long, this might be the right loan product for you.  The “caps” typically present in an adjustable rate mortgage can protect you from an increase for 3, 5, 7 or even up to 10 years.  Remember you can always refinance and there is always the possibility that rates will go down and your payments might be lower.

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