Before you run off and purchase a new home you may want to educated yourself with the different type of home loan interest rates that are available. This first step can help save you both time and most importantly money.
What is a Fixed-Rate Mortgage?
With a fixed-rate mortgage, the interest rate is fixed for the life of the loan and the debt is amortized, or paid in equal monthly installments. It has a steady, flat payment with no change. Whether that life, or amortization period, is 30 years, 15 years, or even less, the payments remain constant until the balance is zero.
This is the type of loan for someone with no tolerance for movement in home loan interest rates, someone who invests in government bonds rather than volatile stocks and new ventures, someone who does not want to review the money rate section of the Wall Street Journal daily to figure out what the next mortgage payment will be. If you have a fixed income, or one that does not move with the economy, this is your loan. Or if you are merely conservative by nature, this is your type of home loan.
Home loan interest rates with a fixed-rate are predictable. You have certainty that as the years go by, you will never have payment shock. What you paid in the first month of your home ownership is that same amount you will pay when you’re old and gray and the roof on your home has been replaced once or twice.
What is an Adjustable Rate Mortgage?
With an adjustable-rate mortgage (ARM), the home loan interest rates are adjusted periodically to keep it consonant with changing market rates. It has a lower start interest rate, the easiest qualifying, and is usually predictable early, but not always. Bankers like this because the loan stays close to their cost of funds, a phenomenon referred to as marking to market. This allows banks or institutions the ability to match their assets to their liabilities.
The ARM is the loan for a good planner who has alternative sources of funds or disposable assets. Handling an adjustable-rate mortgage is really a cash-flow issue, so entrepreneurs who are adept at dealing with the cash fluctuations in a business are often well suited for home loan interest rates with an ARM. Also, it is a good loan if you expect windfall profits that will allow you to reduce the principle substantially, thereby lowering your monthly debt.
ARMs involve a teaser rate so the initial payments are lower with home loan interest rates. This introductory rate is arbitrary, set by the lenders to lure you into a deal. Another advantage is that the ARM adjusts to the then-current balance, and one of the factors that influence the size of your payment is the ever-increasing balance for which the interest is charged.
In general, ARMs allow you to qualify for a higher loan amount. If you are in the early years of your career, an ARM may be the best route to your dream home. Or there may be times of low interest rates when you feel as if you’ve gotten a healthy bonus. And, if you are a good planner, that “bonus” should allow you to handle the upward shifts in home loan interest rates with ease, or to add to your payment amount to reduce the principle balance.
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