FIXED VS. ADJUSTABLE RATE LOANS

The Traditional Way to Finance Your Home
It’s easy to understand why the fixed-rate mortgage has been the popular choice of home buyers in America for many years. Your interest rate remains constant for the length of your loan, so the monthly payments of principal and interest never vary. This makes it easy to budget for a fixed-rate mortgage. And it frees you from the uncertainties of mortgages with fluctuating rates.

Most lenders offer a fixed-rate mortgage with terms of 10 years, 15 years, 20 years, 25 and 30 years. The 15year and the 30year terms are the most popular today.

The shorter term of your loan, the higher your monthly payments will be. On the other hand, your savings on a loan that matures faster could be substantial. Not to mention the satisfaction of owing your home sooner.

How to Qualify for a More Expensive Home
Over the past decade, the Adjustable Rate Mortgage (ARM) has increasingly popular. Unlike mortgages with a fixed rate, the ARM’ s interest rate may rise or fall over the term of the loan.

Typically, an ARM is linked to some economic indicator beyond the lender’s control, such as the U. S. Treasury Security index or the prime interest rate of area banks. As the indicator fluctuates, so will the interest rate of your mortgage.

In order to protect you against unreasonable or rapid increases, most Adjustable Rate Mortgages have interest rate caps and lifetime caps.

A cap limits the increase or decrease allowed during each adjustment period. For instance, a 2% annual cap means your interest rate won’t rise or fall more than 2% in any one year. A lifetime cap limits rate fluctuations over the life of your mortgage. For instance, if the lifetime cap is 6%, that’s the most that can be added or subtracted from your initial interest rate over the entire term of your loan.

Generally, the initial rate of an ARM is below that of a fixed-rate mortgage. This could qualify to buy a more expensive home. In any case, under an ARM program, your initial monthly payments are usually lower than with a fixed-rate mortgage.

The Ability to Convert
Some Adjustable Rate Mortgages come with a conversation feature. It enables you to convert an ARM to a fixed-rate mortgage if you act within a specified period of time.

The conversion feature is a nice option to have if you believe the future trend will be toward generally rising interest rates. If the trend seems to be toward falling rates, an ARM lets you benefit from the lower interest rates.

The Most Popular ARM’S
6 month ARM, 1 year ARM, 3 year ARM, 5 year ARM, 7 year ARM, 10 year ARM.

The Most Common Indexes
Can be found in the wall street journal.