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Fixed vs adjustable mortgage: Choose the one that suits you best


Whether you are a first time mortgage buyer or an experienced buyer, you have several mortgage options to pick from. In order to select the right mortgage, it is very much important that you must be well aware of the benefits and drawbacks of different mortgage types. The most important thing that you need to consider while taking out a mortgage loan is that the mortgage must be affordable to you. In other words, you should not face difficulty in paying off the mortgage loan. Here we discuss about two important mortgage types along with their advantages as well as the disadvantages.

Fixed rate mortgage

Fixed rate mortgages are the oldest and the traditional type of mortgage loans. Here the rate on the mortgage loan remains fixed throughout the term of the loan. A fixed rate mortgage can be of 10, 15, 20 or 30 years duration. As the mortgage rate is fixed, the monthly mortgage payment amount remains fixed over the entire term of the loan. Some reasons for selecting a fixed rate mortgage are listed below.

•    You want to stay in the house for a long time period.
•    Since the mortgage rate is fixed, you have to make predictable and fixed monthly payment throughout the entire term of the loan.
•    Since you pay fixed monthly payment, it becomes easy for you to plan your budget.

Again, some reasons for not selecting a fixed rate mortgage loan are listed below.

•    Generally, the rate of interest on a fixed rate mortgage is higher than other comparable mortgage loans.
•    By choosing a fixed rate mortgage, you actually lock the mortgage rate throughout the entire mortgage term. Even if the market rate of interest declines, you can’t take its advantage.

Adjustable rate mortgage

In case of an adjustable rate mortgage, the interest rate may increase, decrease or may even remain constant. In fact, the rate of interest on an adjustable rate mortgage depends upon the prevailing market rate of interest. Initially, the rate on an ARM is kept at lower level than that of a comparable fixed rate mortgage. Once that initial period is over, the rate varies with the market rate of interest. Some reasons for selecting an adjustable rate mortgage are listed below.

•    In case you want to stay in a house for a shorter period of time, an adjustable mortgage loan is a better choice than a fixed rate mortgage.
•    Interest rate on an ARM is lower in the initial period than that of a comparable FRM. However, the rate may increase or decrease once the introductory period is over.

Again, some reasons for not selecting an ARM are listed below.

•    The monthly payment amount varies. It is indeed hard to predict the monthly mortgage payment amount. So, some kind of uncertainty is attached to this type of loan.
•    The monthly mortgage payment amount may go up once the introductory period expires.

These are the two broad mortgage types. Depending upon your requirement and risk tolerance, you have to decide the mortgage type.

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