Fixed Rate And Adjustable Rate Mortgages What You Need To Know Before You Make A Final Decision

T

he dominating and most
popular interest rates used     Adjustable rate mortgages are a
when considering a mortgage     good choice for those who may be
are fixed rate and adjustable         in the following positions. You
rate mortgages (also known as ARM     should choose an adjustable
or variable rate mortgage).           mortgage rate if there are
Choosing the type of interest         unpredictable interest rates,
rate for you should be used based     making a fixed rate difficult to
on personal criteria and what it      obtain or if you are willing to
is you want to achieve with your      bear the risk for the possibility
monthly payments.                     of the interest rate increasing
                                      and are rewarded by an initially
Adjustable rate mortgage are          lower rate. The person who
loans that a borrower pays an         chooses this type of rate must
interest rate on the loan amount      realize that interest rates do
that changes based on specific        change often, and if they go up,
indexes that the lender chooses.      your payment may be higher than
Lower monthly payments are            the original rate dictated, and
offered at first then the monthly     may be lower if the interest rate
payment might be higher or lower      decreases.
based on the interest rate of the
index at that time. The               It is important to prepare
adjustment period, or the period      yourself for these possible
between the change of interest        changes in the market so a
rate may be decided between you       monthly payment that is
and the lender. However, the          considerably higher or lower
adjustable rates often change         after the adjustment period does
based on a six month, one year,       not come to a shock, whether
three year, five year, or even        positive or negative, to your
seven year period.                    personal finances.

                                      used to determine the rate,
So how exactly is this adjustable     initial change cap, the periodic
rate mortgage determined? The         cap, lifetime cap, what the
original interest rate may be         margin is and if the margin is
chosen based on an index, or a        variable or constant over the
publicly published financial          life of the loan, and if you have
index such as treasure securities     the option to convert your loan
or national or regional average       to a fixed rate loan at a future
costs of funds of savings and         time.
loans associates. A margin is
then added to the index               Caps are limits that are set on
determining the interest rate.        the interest rates of the loan.
The margin is usually the             They are always available to the
lenders' profit above the             borrower and are expressed in the
financial index.                      following fashion: 2/2/5. The
                                      first number is the initial
If the original interest rate is      change cap, which is the limit
offered at an extremely low rate,     set on the interest rate for the
then the lender may be offering       first adjustment period. The
you a discounted rate, which          second number is the periodic
temporarily maintains your            cap, which is the limit set on
monthly payments low for a            the interest rate for every
specific introductory period then     subsequent adjustment period. And
changes according to the index        the third number is the lifetime
rate and adjustment period.           cap, or the total limit set on
                                      the rate for the life of the
When considering an adjustable        loan. It is often set at 6% for
rate mortgage, it is important to     the first mortgage but may vary
compare the terms, which may          depending on the loan. Of course,
include, the index that is being      the lower the numbers the better

for the borrower. Always be sure      the interest rate, the margin,
to ask the lender this                and any fees or points that you
information so you can make an        may have to pay the lender in
educated decision on if the           exchange for borrowing the loan
specific adjustable loan is going     amount. Always ask about fees and
to work for your financial            points because they may not be
situation.                            clearly outlined or expressed
                                      when first considering a loan.
A fixed rate mortgage is a loan       Or, they may need to be added to
where the interest rate remains       the interest rate directly
the same for the life of the          advertised to the borrower. You
loan. The initial interest rate       do not want to agree to a fixed
is often higher than an               rate loan, and then be surprised
adjustable rate, but produces         by a fee or points that were not
stable monthly payments. A fixed      added originally, but were
rate mortgage is good for those       disguised in small print.
who want to always have the same
monthly payment and don't want to     Recently, a "hybrid" adjustable
risk having a higher monthly          rate mortgage has developed. This
payment or benefit from a lower       "hybrid" rate has an introductory
monthly payment that an               rate for a two year period, or
adjustable rate may produce.          three, five, or seven year
                                      period, then becomes a six month
When considering a fixed rate         adjustable rate mortgage after
loan, it is important to look at      this time period, rather than
the terms which may include           every two years. This specific
interest rates, monthly payments      rate is good for those who are
and fees. A fixed rate loan is        planning to move within seven
simpler than an adjustable rate       years, or simply want to live in
loan, but still you must look at      a more expensive home that may

beyond his or her abilities to        beyond the date when you paid the
qualify for a fixed rate loan, or     loan in full. A due on sale
live in an area where home values     clause simply states that the
rise quickly.                         borrower must pay off the entire
                                      loan if he or she sells the
With both adjustable and fixed        mortgaged property. These terms
rate mortgages, you should            may or may not be part of the
compare other terms such as           mortgage, but it is important to
prepayment penalties or due on        know every aspect of your
sale clauses. Prepayment              mortgage, whether or not it is a
penalties are fees that are paid      fixed rate or adjustable rate
to the lender for paying the loan     mortgage. This can save you the
before the life of the loan is        costs of choosing a mortgage that
finished. The lenders are, in         is not right for your personal
essence, earning what they would      situation.
if you paid the interest for the

rest of the life of the loan

About the Author:

John R Blakefield is a mortgage and real estate specialist. For more information, articles, news, tools and valuable resources on home mortgages or investment loans, refinancing, debt solutions, visit this site: http://www.scourtheweb.com/mortgage/.