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In choosing a mortgage loan for your home you have a choice between an adjustable rate mortgage and a fixed rate mortgage. The primary difference between the two is that the interest rate with adjustable rate mortgage has the potential to go up or down depending on economic factors while the interest rate for a fixed rate mortgage remains the same throughout the life of the loan.
What’s Good?
• With a fixed rate mortgage monthly payments remain stable over the course of the loan. Interest rates in the economy can go up or down, but the interest rate for your fixed rate mortgage remains the same. This means that your monthly interest and principal payments will not change as long as you are paying the loan.
• No unexpected increases in monthly payments due to interest rate increase. Since the interest rate does not change, you are not subject to increases with your monthly payment as you would be with an adjustable rate mortgage. With a fixed rate mortgage, you don’t have to worry about income increases to ensure you will be able to cover future mortgage payments.
• Easier to budget because your monthly payments are stable. Since you always know what your monthly payments are going to be, it is easier to budget from year to year when you have a fixed rate mortgage.
What’s No So Good?
• Higher initial monthly payments as compared to an adjustable rate mortgage. In the first few years of your fixed rate mortgage, your monthly payments will be higher than if you had an adjustable rate mortgage.
• A higher income is necessary to qualify for a fixed rate mortgage. This is because the fixed rate mortgage has a higher interest rate and subsequently a higher monthly payment. Lenders need extra assurance that you will be able to handle the monthly payment. Thus, the increased income requirement.
• May need to refinance if interest rates drop. If market interest rates drop and you keep your fixed rate mortgage, you will end up repaying much more in interest than if you refinance. Should the time come to refinance, compare the amount that you would pay in interest over the life of your loan to the cost of refinancing and the amount you would save.
Repaying in Half the Time
One of the factors that attracts borrowers to the fixed rate loan is the ability to repay in 15 years instead of 30. All the characteristics of a 30-year fixed rate mortgage are present with a 15-year mortgage, but there are some key differences. The interest rate with a 15-year fixed rate mortgage will be lower than that of a 30-year. However, since you are repaying the loan in a shorter period of time, the monthly payments will be higher.
Is the decrease in interest rate worth the increase in price? Usually, a borrower chooses a fixed rate mortgage, not because of the lower interest rate, but because of the decrease in time it takes to own the home. With a 15-year fixed rate mortgage, the homeowner gains home equity quicker than with a 30-year.
Keywords: Fixed Rate Mortgage
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