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Fixed or Adjustable? It Depends

If you have ever shopped for home loans in AL before then you surely have heard of the two types of mortgages: Fixed rate and adjustable rate mortgages. The differences between the two can actually be complicated and every home buyer should analyze which one would be ideal for your situation.

A fixed-rate mortgage is the most common type of mortgage loan, with a set payment each month. A variable rate mortgage is known as an adjustable rate mortgage or ARM. These loans have interest rates that can fluctuate over the lifetime of the loan. Let us take a closer look at the differences between the two.

Adjustable-Rate Mortgages

An adjustable-rate mortgage will have a low interest rate for the first several years of the loan. This has the advantage of driving down the monthly cost of the loan initially and allows borrowers to afford a larger, more expensive home. The theory behind this is that wages will increase with time and in the event that the rate increases, the natural increase in income will compensate. If you have plans to only stay in the home for a few year, then an ARM would be more advantageous to you.

Another advantage of the ARM is that when the rate falls then the loan payment automatically decreases without the need to refinance. This is opposed to a fixed rate mortgage needs to be refinanced to take advantage of lowering interest rates.

There are some instances in which an ARM can be the wrong move to make. The problem is that the future cannot be predicted, and interest could rise quickly. This could create a situation in which a mortgage holder can no longer afford his/her payment. While there is a lifetime cap, if the rate changes quickly then it could reach the cap in short order. This was the case for thousands of borrowers during the housing crash of 2008.

Fixed-Rate Mortgages

A fixed-rate mortgage allows consistency to the borrower for the life of the loan. The payment will never change which makes budgeting a much easier task. During a time when interest is at historic lows then locking in a record-low interest rate over 30 years is perhaps as good as it could get. The other advantage is that if a borrower can afford the mortgage payment at the beginning of the loan, over time as wages increase the percent of his/her income going toward housing decreases. If you plan on staying in the home for the entirety of the loan, then this might be a better choice for you.

A fixed-rate mortgage can also be a bad move for some borrowers. If interest rates go lower and the borrower wants to take advantage of them then they will have to refinance. Refinancing can cost several thousand dollars and there is no guarantee that the new rate will be the best there ever will be. Timing can therefore become an issue with a fixed-rate mortgage.