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A Fixed Rate Compared to an Adjustable Rate Mortgage

Pro's and Con's of A Fixed Rate Compared To an Adjustable Rate Mortgage


Ever thought of the complex difference between a fixed rate and an adjustable mortgage rate? Do you have problems deciding on which of them is best for you as a homeowner? This article is meant to throw more light on these two mortgage options for the better understanding of every potential homeowner with pros and cons of each option.



Fixed Mortgage Rate:

A fixed mortgage rate has an interest rate that is constant throughout the lifespan of the loan. However, the amount for monthly payment might vary from month to month, but the total payment is always the same. Most homeowners would find this option as the best as budgeting is made easy for them.


Pros

1. Stability: A fixed mortgage rate makes it possible and easier to predict your mortgage amount to be paid in the coming months and years in some cases. This can be very helpful for simple and smarter budgeting in the long run.

2. Free from sudden rate increase: In some cases where mortgage rates unexpectedly rise up to 15% or more, you won’t be impressed with your monthly mortgage payment. Working with the fixed mortgage rates will leave you out of any sort of rate increase.


Cons

1. Higher initial interest rate: Fixed mortgage rates tend to come with a higher initial rate than adjustable mortgage rates. This can limit the kind of house you can initially afford, and can as well be an added stress on your budget in case you’re a first-time home buyer.

2. Difficult Advantage of Lower Interest Rates: If you happen to be on the fixed mortgage and would like to take advantage of the lower interest rates, you’ll be required to refinance. While refinancing is known to be a good idea for every homeowner, the factor to consider should be the closing cost and the many hours needed to do paperwork just to take the advantage of lower interest rate.


Adjustable Mortgage Rates:



Adjustable mortgage rates are generally known as known as a mortgage that can be periodically adjusted to reflect current market conditions. The most common ARMs are the 5/1 while you can as well see the 7/1 ARMs and 10/1 ARMs. The first number represents how long in “years” the fixed interest rate would last (this implies the 5/1 last for 5 years), while the second number represents how often it is possible for the rate to change.


Pros:


1. Interest rates might go down: The interest for an adjustable mortgage rate won’t increase after the fixed rate period ends. Depending on how you time your mortgage, you might see a decrease in your rates.

2. Lower initial interest rate: One fact that get people running for an adjustable rate is that it initially lower interest rates. This calls for lower monthly payment initially.


Cons:


1. Potential rising interest rate: Of course with the possibility to have a lower interest rate after the fixed rate period ends, it as well as the possibility to go up. You might have a higher interest rate that goes above what you would pay for a fixed mortgage rate.

2. Uncertainty: Working with an adjustable mortgage rate will leave you with several uncertainties than you imagine. You can’t determine how much interest you can pay per month. Some homeowners would go for a fixed mortgage rate for just this reason.

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