Fixed Rate vs. Variable Rate Home Mortgage
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by: marciafreeman
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If you have been holding back on applying for a home mortgage, the recent drop in interest rates may mean that now is the time to act. If you are a first time home buyer, understanding the kinds of home mortgage available to you may be difficult. Here is an explanation of the two basic types of home mortgage, adjustable rate and fixed rate mortgages.
In a fixed rate mortgage, the interest rate and monthly payment amount never change, regardless of changes in federally set interest rates. Whatever the rate when you close the loan, that is the rate you will have until you sell the property, refinance, or pay off the home mortgage completely. You pay a premium for the certainty of a fixed payment since lenders usually charge slightly higher interest rates for a fixed rate home mortgage.
On the other hand, the interest rate for adjustable rate mortgages "adjusts" as national interest rates rise and fall. When the prime rate is high, your mortgage interest rate increases; when the prime rate is low, your mortgage rate drops. Your monthly payments rise and fall accordingly. Because this kind of mortgage is less risky for banks, they set the interest rates for adjustable rate mortgages slightly lower than they do for fixed rate mortgages. They also offer an introductory period, usually three to seven years, during which the interest rate on your home mortgage is locked at an attractively low rate.
Which one is best for you? Avoid immediately being swayed by the lower rates offered by adjustable rate loans. How long do you plan to stay in your house? Are rates likely to go any lower during your stay? If you are buying a house during a period of record high interest rates, an adjustable rate mortgage is an excellent idea, since its likely that rates will go down. Adjustable rate mortgages are also good for people who plan to resell their house during the introductory period. However, if you plan to keep your house for longer than the introductory period, and interest rates are low, a fixed rate mortgage may be the best choice because you can "lock in" the prevailing low interest rate.
Consider not only your own financial condition, but national trends in interest rates, when you choose a home mortgage. Both types of home mortgage loan are excellent ideas at the right time.
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