Types Of Loan Programs Fixed vs Adjustable

Types Of Loan Programs Fixed vs Adjustable

One of the first choices a homebuyer will need to make is whether you want a fixed-rate or an adjustable-rate mortgage loan. The majority of loans will fit into one of these two categories.

Fixed Rate Mortgages

A fixed rate mortgage has an interest rate that does not change throughout the life of the loan. Although the amount of principal and interest paid each month varies from payment to payment, the total payment remains the same, which makes budgeting easy for homeowners. In the beginning, the amount of your payment that goes toward interest is higher than the amount that goes towards the principle balance. As you progress toward the end of the loan period the amount going to interest is dramatically reduced and the amount going toward the principle balance is much higher.

Adjustable Rate Mortgages

The interest rate for an adjustable rate mortgage is a variable one. The initial interest rate on an ARM is set below the market rate on a comparable fixed rate loan, and then the rate rises as time goes on. If the ARM is held long enough, the interest rate will surpass the going rate for fixed-rate loans.

 ARMs have a fixed period of time during which the initial interest rate remains constant, after which the interest rate adjusts at a pre-arranged frequency. The fixed-rate period can vary significantly – anywhere from one month to 10 years; shorter adjustment periods generally carry lower initial interest rates. After the initial term, the loan resets, meaning there is a new interest rate based on current market rates. This is then the rate until the next reset, which may be the following year.

Which Loan Is Right for You?

When choosing a mortgage, you need to consider a wide range of personal factors and balance them with the economic realities of an ever-changing marketplace. However, in today’s marketplace the difference in rate between a Fixed Rate Mortgage and an Adjustable Rate Mortgage is so small it’s often the safer choice to elect a fixed rate knowing that regardless of what happens in the world or at home your payment will remain the same.

 

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