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…Home loans fall into two camps: fixed or adjustable mortgage rates….[This article] weighs the pros and cons.
What is a fixed-rate mortgage’s advantage?
A fixed-rate mortgage – the most popular types are the 30-year and 15-year varieties – keeps the same interest rate for the life of the loan…[and] because you have a fixed-rate period, your monthly mortgage payment will stay the same, too…unless it includes property taxes, insurance premiums or homeowners or condo fees that could change.
What’s the benefit of adjustable-rate mortgages?
An adjustable-rate mortgage, or ARM, starts out like a fixed-rate loan, with an interest rate that’s steady for a certain number of years. After that, the rate starts “adjusting,” or moving based on changes in the LIBOR financial index (although some ARMs set a cap on how high or low your interest rate can go) and, as such, has the potential to increase or decrease. That means your monthly payment also can change.
An ARM will be described in terms of two numbers, such as a “5/1 ARM” or a “3/5 ARM.” The first tells how many years the rate will hold during your introductory period. The second tells how often the mortgage rate will adjust after that so, a 7/2 ARM, [for example,] is fixed for the first seven years and then adjusts every two years but most often, the adjustments come annually…
Adjustable or fixed-rate mortgage: which one’s better?
Fixed-rate mortgages usually have a higher interest rate than the initial interest rate on a variable rate loan, but you won’t have to worry about your fixed-rate ever going up. It also won’t ever go down.
ARMs usually start with a lower interest rate than fixed-rate mortgages, but your interest rate rising after the initial fixed term is a real possibility.
Which Is the Better Type of Mortgage?
The better type of mortgage depends on what fits your circumstances.
- A fixed-rate mortgage is more attractive if you might be in the home for a long time. You can feel assured that your mortgage rate will never go up — and drive your payment higher.
- An ARM is better if you might sell the house in five years, seven years — however long you have before the loan starts adjusting. You can enjoy the low-interest rate at the start of the loan and get out before the mortgage has the potential to get more expensive.
Editor’s Note: The above excerpts from the original article by Doug Whiteman have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
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