Fixed And Adjustable Rate Loans- Which Is Best For You?
When you are buying a home, and you are presented with mortgage options, there may be more options available to you than you think. Specifically, you may have the option of a fixed rate or an adjustable rate mortgage loan.
This is a big decision—you’ll have to live with it for the duration of your mortgage, usually 30 years—so understanding the difference between these two loan options is pretty important.
What is an Adjustable Rate Loan?
Adjustable rate loans are those where the interest rate—and thus, your payment amount—will change during the course of the loan. There may be a period at first where the interest remains the same, and there may be a floor or ceiling, limiting how high or low the interest can go.
The problem with adjustable rate loans is that you are gambling—you have no idea if the interest rates, and thus your payment, will increase—perhaps to more than what you can afford. Of course, if interest goes down, you get the benefit of that and could see a lowered monthly payment.
Adjustable rate loans may be best when buying property when the interest rate is high, because you can take advantage of whenever the rates go lower in the future. You aren’t forever locked into a higher interest rate.
Many adjustable rate loans start out for a period of time at an interest rate that is generally lower than the current rate, as an incentive to get you to take out the loan. If you are looking to hold property for only a short period of time, or you anticipate being able to make a full payoff of the loan in a few years, this can make an adjustable rate loan an attractive option.
Fixed Rate Loans
As the name implies, fixed rate loans are loans where the interest rate stays the same, during the course of the loan.
This is a “safe bet”; so long as you can afford the loan payment, you don’t have to worry about what is happening with interest rates in the future—if they go up, you are safe, locked into your original interest rate.
But if interest rates go down, other people will be enjoying lower payments than you, as your loan won’t change to keep up with the lowered interest rates. You could always refinance, but you would need to have the credit to do that—as well as paying any closing costs or fees associated with a refinance.
Other Mortgage Products
Smaller or private lenders may offer other, stranger mortgage products, that may be interest only, or which may have favorable introductory rates, or other nontraditional features. Always make sure you know the possible risks for these kinds of loans, as many of them got homeowners in financial trouble during the financial meltdown of the late 2000s.
Call the West Palm Beach real estate lawyers at The Law Offices of Larry E. Bray today for help and to have your questions answered in your real estate closing.