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.
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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Adjustable rate mortgages are written as 5/1 or 7/1.
This means that in 5years your interest rate will reset against the current index. (Higher or Lower)
Some things to consider, Do you plan to stay in your home for 15 or 30 years?
Will interest rates rise in 5yrs and can you afford a spike in rates in 5 or 7 years?
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When you are deciding if a fixed rate home loan or an adjustable rate mortgage is your best choice, you need to give thought to several other factors. Ask yourself, whether it is more important to be able to plan your monthly or annual budget without wondering whether your mortgage will fluctuate up or down, whether you would prefer to receive a lower interest rate in the beginning of your mortgage, how long you plan on staying in your home, your work situation and where you see yourself in the coming years and what types of adjustable rate mortgage terms are available today.
Also Remember that if you feel there are advantages to both you do have a number of options open to you. For example, if you think that the interest rate that is being offered to you on a fixed rate mortgage is too high for you but you want the security of not having to be concerned about a fluctuating rate of interest you can buy down your interest rate by purchasing what are referred to as points. This will increase your up front costs for your home loan; however, it may be worth it to decrease the ongoing monthly payments by lowering the interest rate. This is especially true if interest rates are currently high.
If you do elect to secure an adjustable rate mortgage loan make sure you understand exactly how high the rates may go (What is the cap) as well as to ensure you have enough ‘wiggle’ room in your monthly budget to cushion increases if they occur. Also check how often rates can reset and when. By purchasing the correct configuration of an adjustable rate home loan you may have the best of both worlds. There are literally dozens of home loan options today for both fixed and adjustable rate mortgages. Speak with your home loan mortgage specialist today to discuss your ideal home loan.
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