What You Should Know About Mortgage Loans
by: lisabaldwin on Tue, 3 Feb 2009 at: 10:43 AM Go to: Previous Article Next Article
While there are many different types of mortgage loans available at present, they can generally be grouped into two kinds: fixed rate mortgages and adjustable rate mortgages. Deciding which type of mortgage loan to apply for will depend on your particular set of circumstances and how much risk you are willing to incur. In this article, we will cover the benefits and drawbacks of both mortgage loans, and give you some hints on choosing the best mortgage loan for your needs.
Fixed Rate Mortgages
Fixed rate mortgages are generally better options if security and stability are your primary concerns. Since fixed rate mortgages have a predetermined interest rate throughout the entire course of the loan, you will know exactly how much you have to pay every month. Therefore, you will be paying the same monthly principal and interest rates during the entire period of the mortgage. While there are some adjustable rate mortgages that offer a fixed interest rate at the start of the mortgage period, the interest rates for fixed rate mortgages stays the same for the duration of the loan.
One disadvantage of fixed rate mortgage loans is that they typically have a higher interest rate than an adjustable rate mortgage. In general, the longer the term of your mortgage loan, the larger the premium between a fixed and adjustable rate mortgage. If you intend to live in the home for a long time and you anticipate an increase in interest rates in the future, the increased expense that you pay today can result in considerable savings in the future.
Adjustable rate mortgages (ARMs) Adjustable rate mortgages attend to provide a homeowner with a lower initial interest rate but more uncertainty about interest rate and payment changes in the future. Interest rates on adjustable rate mortgages fluctuate based on general interest rates (otherwise known as an index). There are many adjustable rate mortgages that can be considered hybrid mortgages, in that they offer a fixed interest rates for a period of 1, 3, 5, or 7 years. Many other types of ARMs typically have shorter interest rate adjustment periods however. If a homeowner knows that they will only stay in their home for a few years, then a hybrid adjustable rate mortgage loan may meet their needs. Bear in mind however that payments for adjustable rate mortgages may rise along with the rest of your interest rates. Many ARMs however impose limits on how high interest rates can increase during an adjustment period.
Choosing the right mortgage loan for you How do you make a decision on which types of mortgage loans to go for? As we mentioned at the start of this article, that decision is dependent on the risk that you are willing to incur and your present situation. Fixed rate mortgages are generally a safer option simply because you know how much you will have to pay each month. Adjustable rate mortgages on the other hand may be less expensive initially, but carry more risk. In any case, careful comparison shopping will help you decide which mortgage loan will best suit your needs.
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