Posts Tagged ‘home refinance’
Advantages And Disadvantages Of Fixed-Rate Vs Adjustable-Rate Home Mortgages
October 27th, 2011 | 
Author: When you want to build your own family; you will need a home of your own. However, owning a home is not as simple as it seems. If you are very rich with lots of savings; buying a house will be easy for you. However, if you don’t have enough money saved up yet, you can still purchase a house by financing it through a mortgage loan.
A mortgage loan is a loan given by a bank or any other lending institution so that a person can afford to purchase a house he wants. When a mortgage loan is given to a person, he is allowed to use the bank’s money to purchase a home of his choice. The bank giving the loan will add interest on the total amount of cash value, called the principal, borrowed by the person. The interest will depend on the current economic indicators.
There are basically two types of home mortgages which a person can choose to purchase his/her first home or for a home refinance. These are the fixed-rate mortgage and the adjustable-rate mortgages. Each type of mortgage has its own advantages and disadvantages. It is advisable to understand the differences between these two types of mortgages so that you can choose the mortgage that will best suit your needs.
The Fixed-Rate Home Mortgage: If you are struggling with your budget; the fixed-rate home mortgage is ideal for you. Fixed-rate home mortgages are charged with a set rate of interest which is fixed for the entire term of the loan. The advantage of a fixed-rate home mortgage is that the total amount that you have to pay will remain the same. The payments you will make consist primarily of interest payments during the initial years of the term. However, during the later part of the term, the payments will go towards the reduction of your loan principal.
Another advantage with fixed-rate mortgage is that the person who was granted the loan is protected from any sudden and potentially significant increase in monthly mortgage payments due to the rise of interest rates. Of course, this advantage is considered to be the main one. Economies of even the most developed countries such as the US are very volatile and can change dramatically at any moment. When such thing happens, inflation may occur which will cause an increase in the interest rates. A fixed-rate mortgage protects a loan borrower from these changes. This means that whatever payments computed through a mortgage calculator will remain same throughout the loan’s term.
The Adjustable-Rate Home Mortgage. An adjustable-rate home mortgage (ARM) has interest rates that vary over time. An ARM starts out by offering an interest rate which is lower than the interest rates offered by fixed-rate mortgages. However, this rate will only last for a specific part of the total loan term. As the term progresses, the interest being charged by the bank will increase until it surpasses the going rate for fixed-rate mortgages.
The low interest rate of the ARM will only remain constant only for a fixed period. After this period is reached, the interest rates are adjusted at a pre-arranged frequency.
It is very difficult to understand adjusted-rate mortgages mainly because of the many factors affecting the adjustment of interest being charged on the loan. The adjustments of the interest rates depend on different adjustment indexes such as the interest rate on certificates of deposit, the treasury bills or the LIBOR rate. However, a person planning to apply for an adjusted-rate mortgage may negotiate with the lending institution to apply caps and ceilings on the interest charges on the loan. Ceiling refers to the highest amount of interest that can be charged on the loan.
ARMs are ideal for most people because they offer lower initial payments and allow a person to qualify for a larger loan. Also, in an economy with a falling interest rate, the person with an ARM will be able to enjoy lower interest rates as the loan term progresses. However, when interest rates rise due to poor economic indexers, a person may find himself paying a significantly higher monthly payment than what he bargained for.
Article by John Hoots of ChicagoMortgageSpecialist. For more information on Chicago mortgage brokers, visit his site today.
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