Fixed Rate Mortgage Vs Adjustable Rate Mortgage
As you start exploring the world of home mortgages, you will come to know that banks and financial institutions have created many options for you to choose from. You will be offered with no down payments, low closing costs, low interests, or all of the these. Interest rate is the biggest factor while choosing a mortgage. The lower the rate of interest, the better the mortgage is. But it all depends on what type of rate you choose.
There are two primary types of mortgage such as Fixed Rate Mortgages (FRM) and Adjustable Rate Mortgages (ARM). While the marketplace offers a number of varieties within these two categories, the first step while going for a mortgage is determining which of these two types best suits to your needs. Hence, it is necessary to understand the difference between the two. So, lets go over what is Fixed Rate Mortgage, and what an Adjustable Rate Mortgage is.
Fixed Rate Mortgages (FRM)
The Fixed Rate Mortgage is a mortgage loan where the rate of interest remains the same throughout the term of the loan. A FRM is a good choice if you're buying or refinancing a home during a period when interest rates are low because you can lock in the low interest rate. Although the amount of principal and interest paid every month varies from payment to payment, the total payment remains the same which makes budgeting easy for homeowners. Most of the people prefer this type of mortgage because it allows them to manage their monthly as well as yearly budgets, and know the actual amount they have to pay every month and every year. Moreover, unlike Adjustable Rate Mortgages, Fixed Rage Mortgages are not tied to an index. Instead, the rate of interest is fixed or set in advance to an advertised rate, generally in increments of 1/4 or 1/8 percent.
Adjustable Rate Mortgages (ARM)
An Adjustable Rate Mortgage, also known as Tracker Mortgage or Variable Rate Mortgage, is a type of mortgage loan having the rate of interest periodically adjusted on the note. The interest rate of ARMs vary over time. The initial interest rate for an ARM is set below the market rate on a comparable fixed rate loan, and as time goes on, the interest rate also increases. For instance, if you're paying 5% today, tomorrow you may be paying 8%. If the adjustable rate mortgage is held long enough, its interest rate will go beyond the going rate for fixed rate loans. The interest rate of an ARM changes at predetermined intervals based on fluctuations in market interest rates. ARMs have a long term of 30 year, with a fixed introductory period that ranges from 6 months to 10 years.
Whether you opt for a fixed rate mortgage or adjustable rate mortgage, it is entirely up to you. But while choosing one you should seriously think about both the options and decide which one is best for you.
