Finance Your Mortgage: Fixed Rate or Adjustable Rate
Being able to accurately predict the economic future for the next several years is the only way you are going to be able to answer this question. You need to take into account the fluctuations of the marketplace and the economic ramifications of those changes, as well as several personal factors, when you start looking for a mortgage.
As our economy rises and falls in strength, so too do interest rates; these highs and lows will have an effect on your personal finances.
You need to answer the following question:
— What amount can you afford, today, to make as a mortgage payment?
In order to make the best choice in regards to getting that mortgage, you are going to need to have as much information as you can possibly get. Fixed or adjustable rate financing; what is the difference?
Mortgages generally come in one of two forms; fixed rate and adjustable rate. The first thing you need to decide is which of these types of loans is going to be the one that works best for you; then you can worry about the subset of loans under that type.
A mortgage loan in which the interest rate stays the same for the entire life of the loan is called a fixed-rate mortgage. This type of payment is easy to work into a budget, because it is never going to change.
If the interest rates change, the borrower does not have to worry that their monthly payment is going to go up significantly as a result. The problem is that qualifying for and making the payments on a fixed-rate mortgage loan can be very difficult when the interest rates are high.
Even though the rate is fixed, the term of the mortgage is ultimately what determines just how much you will pay in interest. Your loan will likely be drawn out several extra years, so even though your monthly payments are lower, you end up paying more in the long run.
Lower interest rates are usually offered for mortgages with shorter terms. Mortgages with shorter terms end up costing the borrower less in the long run, because more of the principle is paid each month.
If your interest rate changes over the course of the loan, you have an adjustable-rate mortgage. Initially the interest rate on an adjustable-rate loan is lower than that offered on a fixed-rate loan of the same amount; however, over time this interest rate will rise.
If the loan is over a long enough term the interest on the adjustable-rate loan will exceed the interest rate on current fixed-rate loans. The interest rates will, as the name implies, adjust at pre-set times over the course of this loan after offering a period wherein the interest rate remains stable.
The loan may offer this stability of interest over any length of time from months to years. Because these loans start off with interest rates that are lower than market, the borrower can qualify to receive substantially more money than they would get with a fixed-rate loan.
If you have borrowed a substantial sum, however, your monthly payments may change quickly and could adjust due to rising interest rates to be more than you can afford. Over the course of a couple of years the monthly payments you have to make on your adjustable-rate loan can double.
Our economy continues to be a driving force behind the dilemma of many people when it comes to home loans.