Understanding Mortgage Loans: Fixed Rate vs. Adjustable Rate

Everyone dreams of owning what called a dream home, and there are various reasons ranging from not having to pay extra rental income, to the fact start building a family estate. Nevertheless, very few can afford to buy a home in cash, whether it’s an independent home or apartment, making it necessary to resort to loans. Mortgages are long-term loans that are used exclusively for the purchase of real estate, the most common being those with 15 or 30 year term. In addition, the cost of the loan depends on the interest rate, which may be fixed or adjustable. Mortgage is a secured loan for the purchase of  houses, buildings, and grounds. This loan is secured because in case of default, the lender can foreclose on the property. The real estate is the collateral for the loan. Mortgage is also known as the “loans for house purchase”.

indexMortgages with fixed interest rate

These mortgages allow you to pay the debt in equal monthly payments for a certain period ranging between 10 and 50 years term. The 30-year period is the most common being observed. Monthly fees are intended to pay interest first, and then the capital. In the first years of the loan, most of your monthly payment goes toward interest, whereas towards the end of the loan period most of your monthly pay is concentrated in the capital. This can be calculated and observed using a table of amortization.

One of the most attractive advantages of the fixed interest rate is the security of knowing that whatever happens, your monthly payments will not change until you finish paying the debt, and this even makes it easier to budget your living expenses.

If the interest rate on the mortgage market goes up or down, this largely affects the loan payments that you have purchased in the past. In addition, if the market rate drops significantly, you always have the option to refinance the loan at a lower interest rate. Besides, you can always make payments for amounts greater than your monthly installments, so the additional amount can be credited to capital, and consequently will reduce the debt faster and save on interest.

You should also consider that in certain cases, lenders charge a penalty if you prepay all canceled debt in a certain period, usually within 1-5 years.

Mortgages with adjustable rate

This type of mortgage is best known for its acronym in English as ARM (Adjustable Rate Mortgage), and as their name suggests the interest rate varies periodically during the term of the debt, and therefore, can lower your monthly payments or can also rise under certain circumstances.

The interest rate that lenders charge for this type of mortgage is usually lower than that charged for fixed-rate mortgages, making this option very attractive. However, if you choose this option, you must assume the risk that rising interest rates bring in the long run, and if this happens, your monthly payments will also rise.

During the first years of the loan, usually 2, 3 or 5 years, the interest rate is fixed. Then go into effect the adjustment period in which the interest rate changes according to an index and a margin determined by the lender. This change will be reflected in your new payment fees, which as already mentioned, can be higher or lower.

This type of mortgage is convenient for people who do not think keeping the house for a long time because it will take advantage of low interest rate during the period of fixed payments, and can sell the house before the interest starts to change.

 

Rashmi Karan is a professional content writer who offers genuine and accurate information about the current real estate trends regarding purchase and sale of both residential and commercial properties across nation.

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