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Fixed Rate Mortgage vs. Adjustable Rate Mortgage
The most basic distinction between types of mortgages that are
available when you're looking to finance the purchase of a new
home is how the interest rate is determined. Essentially, there
are two types of mortgages - fixed rate mortgage and an
adjustable rate mortgage. If you choose a fixed rate mortgage,
the rate of interest that you are paying on your mortgage remains
the same throughout the life of the loan no matter what general
interest rates are doing. In an adjustable rate mortgage, the
interest rate is periodically adjusted according to an index that
rises and falls with the economic times. There are advantages and
disadvantages to either, and no easy answer to 'which is better,
a fixed rate mortgage or an adjustable rate mortgage?
The main advantage to a fixed rate mortgage is stability.
Since the interest rate remains the same over the entire course
of the loan, your monthly payment is predictable. You can count
on your monthly mortgage payment to be the same amount each
month. On the minus side, because the lending institution gives
up the chance to raise interest rates if the general interest
rates rise, the interest on a fixed rate mortgage is likely to be
higher than that of an adjustable rate mortgage.
A fixed rate mortgage loan makes the most sense for those that
are going to settle into their home for many years. While the
initial payments may be larger than with an adjustable rate
mortgage, stretching the payments over a longer period of time
can minimize the effect on your budget.
An adjustable rate is one that is adjusted periodically to
take into account the rise or fall of standard interest rates.
Generally, the adjustable term is annual - in other words, once a
year the lending company has the right to adjust the interest
rate on your mortgage in accordance with a chosen index. While
adjustable rate mortgages make the most sense in a situation
where interest rates are dropping, though it's dangerous to count
on a continued drop in interest rates.
Lenders often offer adjustable rate mortgages with a very low
first year 'teaser' interest rate. After the first year, though,
the interest rate on your mortgage can increase by leaps and
bounds. Even so, there are limits to how much an adjustable rate
can actually adjust. This is dependent on the index chosen and
the terms of the loan to which you agree. You may accept a loan
with a 2.3% one year adjustable rate, for instance, that becomes
a 4.1% adjustable rate mortgage on the first adjustment
period.
Finally, there's a new kind of loan in town. A hybrid between
adjustable rate mortgages and fixed rate mortgages, they're known
as 'delayed adjustable' mortgages. Essentially, you lock in a
fixed rate of interest for a number of years - say 3 or 7 or 10.
At the end of that period, the loan becomes a 1 year adjustable
rate mortgage according to terms set out in the agreement you
sign with the mortgage or financial institution.
Joseph Kenny is the webmaster of the loan information sites
http://www.selectloans.co.uk/
and also http://www.ukpersonalloanstore.co.uk.
 MORE RESOURCES updated Thu. February / 09 / 2012
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