Compare Mortgage Rates: Fixed And Adjustable

Compare mortgage rates of a fixed rate to an adjustable rate and then decide, but read this article first!

The most common types of mortgages are the fixed rate mortgage and the adjustable rate. Here are the differences between the two.

The thirty-year fixed rate mortgage is the most popular of all. Payments are spread over a thirty year term and they are lower because of this fact. If the term were shorter, you'd pay less in interest, but the payments would be higher. The rate is locked in, i.e., never changes, throughout the entire life of the loan. (Note: In today's volatile market, rates are fluctuating constantly. Don't assume that a rates in the local paper stay the same. They change from day to day; but, as stated, once you are locked in, your rate remains the same.) Even though on a thirty-year loan you're paying thousands of dollars more in interest, (the numbers are staggering), it is tax deductable by 100%.

The fifteen-year fixed rate mortgage is well suited for those who can afford a higher monthly payment. They benefit from a lower interest rate, (typically), because they have higher payments each month. The rule of thumb is the lower the term, the lower the rate. But, you must keep in mind that although you are saving thousands in interest over the life of the loan, you must be able to afford the higher monthly payment, which could be several hundred dollars a month more depending on the loan amount, verses the thirty-year fixed mortgage payment.



An option for those who have a thirty-year mortgage is to ammortize it quicker yourself. What does this mean? If you apply more than the amount due each month, that extra money goes directly towards the principal of the loan and in turn, the loan is shortened. In effect, you can make a thirty-year mortgage a twenty or a fifteen yourself depending upon how much money you apply towards the principal, above and beyond your regular monthly payment. This is often the best way to go because you are not strapping yourself with the higher fifteen-year fixed payment, but you have the option of shortening the life of your loan without being obligated to do so.

Adjustable rate mortgages, known as ARM's, are different from fixed in that the interest rates moves either up or down depending on market conditions. After the fixed period, they adjust on the anniversary of the mortgage each year.

People are often tempted to go with an adjustable rate mortgage because initially, the interested rate is usually significantly lower than the fixed rate. Keep in mind, however, that if you plan to stay in your home for longer than 5 or 6 years, your interest rate will probably be substantially higher than that of the fixed rate.

If mortgage rates are high, you can start with an adjustable to lower your monthly payment and refinance later. (Check on the pre-pay penalty involved.)

Some adjustable rate mortgages change the rate every year, while others begin fixed for typically 3 or 5 years and then the rate adjusts on a yearly basis. Many folks worry about how high their rate will get. A LIFETIME CAP sets a limit on how much the interest rate can rise over the life of the loan. A PERIODIC RATE CAP places a limit on how much your payments can increase at once, and a PAYMENT CAP puts a limit on the total payment of your mortgage, i.e., it can never be higher than X amount.

Adjustable rate mortgages don't always go up, although that's the risk you take when you decide on that option. If the market fluctuates and the rates drop, your interest rate will drop as well. The rule of them is that they follow the trend of the market.

If you plan on buying a property, keep in mind how long you tend to stay there. If this is more of a permanent move, a fixed may be the best way for you to go. If you only plan on staying in the property for a few years, the adjustable rate is a great way to enjoy lower monthly payments before you sell.

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