What to Choose Best - Adjustable Rate or Fixed Rate Mortgage?

What to Choose Best - Adjustable Rate or Fixed Rate Mortgage

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Planning to buy your house you will face the following dilemma: which mortgage is the best - the fixed rate one or the adjustable one? But before deciding which the one suitable for you is, you should first get familiar with the pros and cons of each of the decision.

But from the perspective of the borrower's needs and the term of the mortgage you could easily reach the conclusion that both of them are suitable. But becoming aware of the difference existing between these two it is the step to a wise decision.

The adjustable rate mortgage (ARM) is known also as a rate mortgage that varies according to an economic index and as such the interest rate and the mortgage payments are affected by the changes ion the respective index.

The interest rate that is originally fixed is lower than it is for instance with the fixed rate mortgage. Apart from this, there is the offer of this type of mortgage through which borrower chooses to make a payment at the beginning without needing to pay a penalty fee.

The factor that could determine you to choose an adjustable rate mortgage is that you may end up paying a lower monthly payment. Because all these involve a certain risk on your behalf, the lender will offer an initial rate that is lower than the fixed rate mortgage.

A good option for this ARM is when: you plan to live in the house only for a few years; you expect to have an increased budget or a higher income in the near future; or in case the rate that you have at your fixed rate mortgage proves to be too high.

A con regarding the ARM is that this involves a certain risk when the rates will increase and as such the monthly payments will increase considerably. The point is that the payment could rise so high that you might be forced to default on the loan.

On the opposite corner there is the fixed rate mortgage with an interest that is fixed for the entire duration of the loan payment regardless of the rising in interest rates of the lender. Due to the fact that these rates are pre-settled you have the opportunity to calculate the amount and have it paid from your own monthly income. In this way you could financially plan the future of your finances on a long run.

The cons are that this sort of mortgage comes with interest rates that are higher, not to mention the lenders initiative to draw penalties in case the borrower is tempted to pay off earlier the mortgage or tends to refinance the mortgage rate with an interest rate that is lower.

But the solution can be a shifting towards a mortgage program that allows the borrower to take advantage of lower interest rates. The fixed rate mortgage is indeed an option for the long-term borrowers.

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