Home Mortgage Guide: Fixed Rate vs. Variable Rate
Posted by admin on Oct 18, 2009
Now that interest rates are hitting record lows, applying for a home mortgage may be an excellent idea. If you are a first time home buyer, understanding the kinds of home mortgage available to you may be difficult. Here is a guide to the two most common types of home mortgage, fixed rate and adjustable rate mortgages.
The interest rate and monthly payment amount for fixed rate mortgages do not change over the course of the loan. Whatever rate you are given when you take out the loan, that is the rate you continue to pay until you refinance, sell the house, or pay off the home mortgage. You pay a premium for the certainty of a fixed payment since lenders usually charge slightly higher interest rates for a fixed rate home mortgage.
On the other hand, the interest rate for adjustable rate mortgages “adjusts” as national interest rates rise and fall. When the prime rate is high, your mortgage interest rate increases; when the prime rate is low, your mortgage rate drops. Your monthly payments rise and fall accordingly. Because banks have less risk with adjustable rate mortgages, they set the interest rate on this type of mortgage lower than they do for fixed rate loans. They also offer a grace period, typically 36 months to seven years, during which your interest rate does not fluctuate and is locked at an appealingly low rate.
Which type of loan should you choose? Do not immediately be tempted by the lower interest rates of adjustable rate mortgages. How long do you plan to stay in your house? Are rates likely to go any lower during your stay? If you are buying a house during a period of record high interest rates, an adjustable rate mortgage is an excellent idea, since it’s likely that rates will go down. If you plan to resell your house within the grace period of an adjustable rate mortgage, then opting for an adjustable rate mortgage would be an economical way to get a low cost, short term loan. However, if you plan to keep your house for longer than the introductory period, and interest rates are low, a fixed rate mortgage may be the best choice because you can “lock in” the prevailing low interest rate.
Take into account not only your own finances, but the current economic climate, when deciding what kind of home mortgage is right for you. Both kinds of home mortgage can offer you an excellent deal in the right economy.
A refinance is good financial strategy when interest rates fall lower than your current mortgage rate and your long term plans include remaining in your present home.
It is particularly tempting to refinance a mortgage when the rates on an adjustable rate mortgage are due to reset to a particularly burdensome one. A refinance will not reap you any financial rewards if you intend to sell your home in the near future, however, as it will take close to two years to begin to recoup your closing costs from your monthly interest savings. Once you have paid yourself back for that initial outlay, though, the savings are all yours. You can refinance to a fixed rate mortgage with a longer term than your current loan, giving you lower monthly payments but greater interest costs in the long run.
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