What is the advantage of a fixed rate mortgage over a variable rate mortgage?
Written By: admin on December 27, 2009
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Fixed rate mortgages generally have lower rates than variable rate mortgages
# Fixed rate mortgages require lower down payments than variable rate mortgages
# The interest on a fixed rate mortgages can’t fall
# The interest on a fixed rate mortgage can’t rise
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Simply, a fixed rate loan cannot change over the life of the loan. Thus your principal and interest payment will remain the same. The peace of mind of knowing your loan terms will not change is the most well loved reason a fixed rate is chosen. With a variable rate loan, you risk having your mortgage payment increase when certain indexes in the marketplace rise higher than what they were at the onset of your loan. Historically, when you apply for a mortgage loan, variable rate loans are more attractive in the small term, since they typically have a lower interest rate for the initial period. The loans I refer to, called Hybrid ARMS, typically have a period of 1, 3, 5, 7, or 10 years in which the rate is fixed. After that period expires, the rate is subject to current market conditions (this is when the rate can rise or fall depending on the index upon which the loan is based). The factors to consider before choosing a variable rate loan over the security of a fixed rate loan are:
1. How long do you expect to own your current home?
2. How much is the difference in your monthly payment on a variable rate verses the fixed rate loan?
3. How prepared are you financially to adapt to an adjustment in the rate, if you were to hold the loan past the initial fixed period?