Fixed vs. Adjustable Rate Mortgages - part 1
by Ralph Lorens
A Fixed-Rate Mortgage applies the same interest rate toward amortization ofloan principal for the life of the loan. Fixed-rate mortgages are more straightforward and easier to understand than most Adjustable Rate Mortgages (ARMs). Additionally, fixed-rate loans are more secure for the buyer, and are popular with many first-time homebuyers. Since the risk to the lender is higher, fixed-rate mortgages generally have higher interest rates than most adjustble rate loans.
For example, a lender can offer a 30-year fixed loan mortgage to a homebuyer at a 6.0% interest rate. The loan is locked in to the 6.0% interest rate for the duration of the loan, even if the market interest rate rises to 10.0%. Conversely, if the market interest rate decreases to 5.5%, the borrower will continue to pay the same 6% interest rate.
Benefits of Fixed-Rate Mortgages:
No change in monthly principal and interest payments regardless of fluctuations in interest rates.
More stability may give you "peace-of-mind."
Drawbacks of Fixed-Rate Mortgages:
Higher initial monthly payments compared to those of adjustable rate mortgages.
Less flexibility.
An Adjustable Rate Mortgage (ARM) does not apply the same interest rate toward monthly payments for the life of the loan. Throughout the life of that loan, the homebuyer's principal and interest payment will adjust periodically based on fluctuations in the interest rate.
For example, a lender could offer a 30-year ARM loan to a homebuyer at an initial 4.5% interest rate. During an adjustment period for the ARM loan, the market interest rate could rise to 10.0%, resulting in a significantly larger interest payment. Similarly, the market interest rate could decrease to 5.0%, resulting in lower interest payments.
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Fixed vs. Adjustable Rate Mortgages
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