There are two types of mortgages: adjustable rate and fixed. Both have their benefits and drawbacks and it is best to pay careful attention to your current and potential financial situation in the future before determining the best mortgage loan for your needs. A mortgage is one of the most important investments anyone will make throughout their lifetime and it shouldn’t be entered lightly. Before choosing a mortgage make certain to understand the pros and cons.
A mortgage loan is secured through a mortgage note which indicates that a person is in the process of buying a home from a financial institution. Mortgage loans come with interest rates and these can increase the amount of your monthly payment, as well as the total amount owed over a period of time. A fixed rate mortgage loan indicates that the interest rates you secure at the time of the loan will remain constant throughout the life of the loan. An adjustable rate mortgage loan indicates that the interest rates can change, either increasing or decreasing over the life of the loan.
Because adjustable rate mortgages fluctuate, they often start at a lower interest rate than fixed rates. Due to the fact that interest rates can become lower with adjustable rate mortgages, there is a possibility that you can see lower interest rates over the life of the loan than you would with a fixed rate mortgage. It is also possible, however, that your interest rates could increase to an amount you are no longer financially comfortable paying. It is best to make sure that your income level will increase over time in case your interest rates also increase. In addition to fluctuating interest rates, there are several adjustable rate mortgages pros and cons that must be taken into consideration before choosing the best mortgage loan for your needs.
One of the main benefits of an adjustable rate mortgage is that the initial monthly payments are lower than those of a fixed rate mortgage. For those who expect to maintain one steady level of income throughout the term of a loan, a fixed rate mortgage may be best. For those who expect their income to increase over time, an adjustable rate mortgage can provide many benefits, including the possibility that should interest rates remain low, you will end up paying less for an adjustable rate mortgage than you would with a fixed rate mortgage.
Another benefit to choosing an adjustable mortgage rate is that those who plan on buying a home then selling it in a few years can save a great deal on interest rates by choosing an adjustable rate mortgage. This allows the buyer to tap into the lower interest rates and then sell the home before the rates increase. Those who plan on purchasing a home and living in it for many years may find that an adjustable rate mortgage poses more risks then benefits. If you are planning on remaining in a home and your income is not expected to increase, then consider a fixed rate mortgage.
Other factors that can play an important role in choosing between an adjustable rate mortgage and a fixed rate mortgage is whether or not you intend to pay off your loan quickly or early or if you are going to pay more on your loan than your monthly mortgage payment in order to pay off your principal quickly.
Additional benefits to choosing adjustable rate mortgages include the fact that interest rate caps will limit the maximum interest payment allowed for the loan and you will have the opportunity to apply for a higher loan amount due to the fact that your initial interest rates are lower. It’s important to realize that most adjustable rate mortgages will see an increase in the interest rates after the initial adjustment period. Consider adjustable rate mortgages pros and cons carefully before deciding which type of mortgage loan is best for your financial needs.
There are good and bad sides to each type of home mortgage, almost all of which are based on the circumstances in which the loan is taken out, and the people taking out the loan. Those that prefer financial certainty and predictability to a month-by-month surprise will prefer the consistency of a fixed rate loan. On the other hand, many may prefer the potential savings of an adjustable rate loan.
There’s also the issue of affordability and qualifications. In many cases, securing a fixed rate loan is significantly more difficult than qualifying for a similar adjustable rate mortgage. As such, many of today’s homeowners, particularly those with poor credit, may only be able to apply for an adjustable rate mortgage. This isn’t always the case, however, and differs from one mortgage lender to another.