Choosing the Right Mortgage for You. When it comes to purchasing a house, then most people go forward and borrow the maximum part of their mortgage from the lender. Generally, mortgage loans can be divided into 2 major categories – a fixed rate mortgage and an adjustable rate mortgage. Now, it’s for you to carefully weigh the pros and cons of each of them before you take the decision regarding which is best for you.
The features involved
There are different features associated with the 2 kinds of mortgages. For instance, an adjustable rate mortgage might have an interest rate cap involved. This cap in the interest rate is effectual in limiting the amount till which the interest rate can change during the term of a loan. Adjustable rate mortgages also give you the opportunity to convert to a fixed rate mortgage. That can easily be done for a fee or a higher rate of interest initially.
Now again, both fixed rate as well as adjustable rate mortgages provide you with the opportunity to pay points right at the start of the loan itself. These points would help to decrease the rate of interest on a fixed rate loan. As for adjustable rate mortgages, then they can decrease the margin or perhaps decrease the initial rate on the mortgage itself.
The functions delivered
Basically when it comes to the function of a fixed rate mortgage, then you go on to lock in a set rate of interest for the rest of the life of the loan. Your monthly payment will be set based on both the interest rate as well as the mortgage amount. Generally there’s no scope for changing this rate unless and until you fall behind on your payments or refinance your mortgage. On the other hand, with an adjustable rate mortgage it’s something different. Here your mortgage will be tied to a particular interest rate index. You’ll be assigned a particular margin. Most importantly, when your introductory period comes to an end and periodically thereafter, a new interest rate will be calculated for your mortgage. This’ll be done by adding the current value of the interest rate index to the margin.
Advantages of fixed rate mortgages
You’re essentially immune to the rising interest rates when it comes to a fixed rate mortgage. Now, even if it so happens that the interest rates double, then also nothing happens to your interest rates and monthly payments as they remain fixed. This is one such guarantee that can actually make budgeting for the future so much easier. You’ve got to make a larger payment if your interest rates increase, in the case of an adjustable rate mortgage.
Advantages of an adjustable rate mortgage
When it comes to an adjustable rate mortgage, then there are always high chances that your mortgage loan interests will go down with a fall in the rate of interest. Moreover, you needn’t pay to refinance your loan. With a fixed rate mortgage you’d obviously have to pay a refinance each time you wish to take advantage of the lower rates.
Keep in mind the facts when deciding on the type of mortgages.