Know The Difference Between Adjustable And Fixed Rate Mortgages

In the news nowadays, there are reports of interest rates going up, and potentially getting higher in the future. If you are a future homeowner, this should be of concern; the higher the interest rates are, the less money you will be able to afford to borrow.

You may not be aware that there are options when it comes to borrowing money, options that can at least lessen the financial impact of rising interest rates.

Adjustable Rate Loans

Adjustable rate loans have gotten a bad reputation given that many of them were at the heart of the mid-2000s housing and economic collapse. But the adjustable rate loans that are given nowadays, aren’t like the ones of the early and mid-2000s.

An adjustable rate loan starts with a given interest rate, which will stay fixed for a set period of time–usually around 3-5 years. This starting interest rate is often less than the current interest rates that you would get if you opted for a fixed rate mortgage.

After the initial period ends, your interest rate will be adjusted to the current interest rate, higher or lower, whatever it is at that time. This is somewhat of a gamble–nobody knows what the future holds, and you could find your affordable mortgage adjusting upwards (more expensive) very suddenly and significantly, should the current market interest rates go up.

The good news is that many adjustable rate mortgages have a cap on how much they can go up, often around 2-3 points, so if you have one of these kinds of adjustable rate loans, with a maximum on how much it goes up, you at least have some security knowing what your maximum payment will be.

Benefits to Some People

People planning on remaining in their homes for a shorter period of time, around 5 years, or who anticipate having funds to pay off the loan within that time frame, may not care about the interest rate on the loan adjusting, given that they anticipate moving or paying the loan off at that time anyway.

Fixed Rate Loans

Fixed rate loans give you some sense of security, in that your interest rate (and thus your total mortgage payment) will always remain at its current interest rate and payment. The payment will never change (at least, not because of the mortgage–other things like insurance, homeowners association dues, or taxes, still can fluctuate and thus change your total payment).

Fixed rate loans are good if you get a very good rate, or if interest rates tend to be low at the time that you are purchasing, as you are “locking in” a favorable interest rate.

The drawback is that should interest rates go down over the life of your mortgage, you won’t get the advantage of those reductions, as you are locked into your rate (although you could opt to refinance at some point). And there are costs involved in refinancing.

Call a West Palm Beach real estate lawyer at The Law Offices of Larry E. Bray today for help with anything related to your mortgage closing.

Sources:

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