Friday, November 21, 2008

Which one to choose : Fixed Rate Mortgage Or Adjustable Rate Mortgage?

It is a difficult task to choose between a fixed rate mortgage or an adjustable rate mortgage (ARM), as it greatly depends on the present market scenario and on your individual needs. Let me briefly describe these two types of mortgage rates and their pros and cons.

Fixed Rate Mortgages

According to these loans you have to pay the same amount of interest throughout the term of the loan.That is here you are able to fix the interest rate that suits your needs. Although the interest and the principal varies for every month,the net payment remains the same,which is very convenient for most of the homeowners.

The Fixed Rate is quite simple to understand and helps you to know where you'll exactly stand in near future.The main advantage being you are not affected by the sudden hike in the interest rate. This is recommended for long term loan when the interest rates are comparatively less.

However, once you have the fixed rate mortgage, it is a cumbersome task to take advantage of the dropping rates as it needs a lot of paperwork and an extra cost in refinancing.

Adjustable Rate Mortgages (ARMs)

With an adjustable rate mortgage, the rate of interest is on a constant move, of ups and downs.Most of us are attracted by this because initially you need to give a "teaser" (discounted) interest rate , which is much less than the fixed rate. Then after a certain period of time,the rates will fluctuate according to the general market value.

This is a good option for those people who are aware that their income will increase in future and/or you are about to sell your house within 5 years or so. Also you don't have to refinance when the interest rate falls.

Hope now you have some idea on which of these mortgage rates will be beneficial for you. Regardless of the choice you make, do remember to check out all the probabilities required to avoid costly mistakes.

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