When choosing between the options of interest rates, there are only two choices: fixed rate or adjustable rate. Based on your financial condition, the time you want to live in the mortgaged home, the interest rate while taking the mortgage and risks you want to incur is the best method of deciding which loan is right for you. Being aware of the pros and cons of each loan is useful when choosing whether a fixed rate or adjustable rate loan is right for you.
Fixed Rate Home Loan
A fixed rate home loan gives you monthly principal and interest mortgage payments that remain fixed throughout the duration of the loan. A Fixed rate home loan is a very steady choice with very limited dangers. This is the reason why this loan has gained in popularity amongst the various home finance options today.
Fixed rate home loans can be taken for terms of 30, 20, 15 and 10 year loans and can be chosen if either of the conditions is true:
v Want to reside in the same home for at least 5 years.
v Need the security of steady monthly mortgage payment.
v Want to prevent the dangers of rise in monthly mortgage payment in future.
To reduce the duration of your loan, try to convert fixed rate home loan into biweekly mortgage. As you make payment every 2 weeks, you pay one additional installment in a year, making it total of 26 payments. This reduces your interest payable and increases your equity rapidly. This loan is right for people who want to reside in the home for 5 years or more. This is due to the fact in the beginning period of a fixed rate home loan; the major portion of your monthly mortgage payment goes toward interest. Only a small part goes toward the principal. But as time passes, the situation changes when the loan ages.
Adjustable Rate Loans
Adjustable rate loans are good if you do not want to stay in your current house beyond 5 years. Adjustable rate loans are easier to obtain and might simplify your task of owning your home. If your salary rises in the future, you can always go for refinancing into a fixed rate home loan.
Adjustable rate loans have a lower introductory interest rate that is below the fixed rate home loan. The low introductory rate makes your monthly mortgage payment lower than a fixed rate home loan. But in exchange for this lower payment, you face the uncertainty of the amount of your monthly mortgage payment. However many adjustable rate loans come with cap protections to prevent your monthly mortgage payment from rising dramatically.
Adjustable rate loans are good in the following conditions:
v Want to relocate before 5 years.
v Can manage to pay higher monthly mortgage payment should the interest rates rise.
v You expect the mortgage interest rates to remain steady or go down later on.
The situation of each borrower varies and only you are the best person to determine whether the risks or benefits are appropriate for you. Use these hints to decide which of the two types of loans are right for you.