DECEMBER 12TH, 2018

Fixed vs. Adjustable Rate Mortgages

There is a mortgage available for every financial need or circumstance one may have. This article covers the differences between Fixed Rate Mortgages (FRMs) and Adjustable Rate Mortgages (ARMs) and should prove helpful to consumers.

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The Basic Facts About Fixed Rate Mortgages-FRMs

Fixed Rate Mortgages (FRM) – Work much the way they infer by offering borrowers a set interest rate, and if the buyer applies while interest rates are low, they will continue to enjoy the lower interest. Fixed Rate Mortgages are a common choice for many consumers wishing to purchase a home. These type of mortgage products “have a fixed interest rate that is guaranteed not to change during the loan period, regardless of how the market fluctuates.” Fixed Rate Mortgages are great for those who want fixed monthly payments and who plan to stay in their home for an extended period. Many buyers like these loan products because they are predictable; this can be very beneficial for folks with fixed incomes or severe budget constraints. Repayment term lengths for Fixed Rate Mortgages can be ten, fifteen, twenty, twenty-five, thirty or even forty years. Thirty-year Fixed Mortgage loans are the most common though. Lastly, at the start of the mortgage period, quite a bit of the money one puts down will go towards paying interest and then as the interest portion of the payment reduces over time, one should be aware that more of the buyer’s money will go towards paying the principal down.

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The Basic Facts About Adjustable Rate Mortgages ARMs

Adjustable Rate Mortgages (ARM) – Riskier than Fixed Rate Mortgages, one would pay interest rates as the market fluctuates instead of a fixed interest rate (see above). This option is fine as long as interest rates drop during the mortgage, but should the rates rise, you could eventually pay more that you would with a fixed rate. An ARM could end up being a benefit if you can tailor it to work towards your specific needs. Say the ARM has a rapid-reacting index, you could take advantage of the dropping interest rates. One may also be interested in an ARM if they need the first year of payments to be lower than future years. If remodeling is in the picture, this loan option could free up cash needed for such improvements. One should always remember the ARM risk factor as your second year could have quite higher interest rates compared to the first year, IF the market goes upward. The risk factor could work in one’s favor if there is a plan to sell the home after a year or more as it could be beneficial for one to pay lower interest during the short period one owns the home.

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