The Differences Between Fixed Mortgage Rates and Adjustable Mortgage Rates

There are so many different kinds of mortgage loans that you may feel overwhelmed when looking for one. The key factors that distinguish one mortgage loan from another are the rate of interest, loan tenure, payment amount and prepayment clauses. The most common mortgages are fixed rate and adjustable or variable rate mortgages. You should go about choosing one of these mortgages based on how much risk you can afford to take, and how long you intend to live in your present residence.

Quick Comparison between Fixed and Adjustable Rate Mortgages

Fixed rate mortgages (FRM) as the name suggests are mortgage loans that carry a fixed rate of interest during the entire loan term. Fluctuations in the lending market have no impact on FRM interest rates. Many people like to go for such a mortgage because they find it easy to plan and budget their finances with fixed repayments every month.

FRMs are mostly for 15 or 30 year terms though there are other available loan tenures as well. They are suitable for people earning a steady income. A clear disadvantage here is you cannot easily negotiate a low interest rate since rates are almost standardized across different lenders. Lenders usually charge a high initial interest rate to account for any fluctuations over the 15 or 30 year loan term to protect their interests.

Adjustable rate mortgages (ARMs) have interest rates that fluctuate according to prevalent benchmark rates in the market. This type of loan carries a higher degree of risk, since your monthly repayments can go up when benchmark rates increase. For example, if you are paying 7% on your loan, you benefit if the rate falls to 5% the next year but you could face financial difficulties if the rates goes up to 9%.

ARM rate changes depend on the mortgage terms. For example, rate adjustments can take place every six months, once a year or after a period of five years. ARMs usually come with a cap on the rate increase during an adjustment period. For example, the lender may only be able to increase the interest rate by 0.5% in the first year.

Fixed rate mortgages have an advantage over adjustable rate mortgages since they carry lower risk. But you should go for an ARM if the current interest rates are high and you expect the rates to fall in the near future. In either case, your choice of mortgage should depend on your current financial position.

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