To understand the difference between a fixed-rate and adjustable rate mortgage is really critical. But if you are not aware of it, you might end up wasting money up front and over the course of your loan. Free Financial Assistance Advisory Portal, MoneyMindz.com helps you understand the difference in order to make you take the best financial decision.
While purchasing a home, you’d probably agree that the buying process can be complex and frustrating. You will be basically given all types of paperwork, most of which you will not even understand and you’re asked to sign it. Excited to move forward and get the keys to your new home, you sign away, without considering the pros and cons of different options you have.
One of those things you may be overlooking is basically the type of rate and loan you get. So, in this article we will have an overview of mortgage rates in general. This will help you know which option suits you the best and you can now sit down and sign your papers.
Fixed rate vs. adjustable rate mortgage
The main difference between a fixed rate and an adjustable rate is that with fixed rate of mortgage, your rate is locked for the life of the loan and it will never change. But with an adjustable rate mortgage, the rate will fluctuate either down or up over time.
Let us have a look at the pros and cons to get a proper picture:
The economy won’t affect your rate
With a fixed rate mortgage, your rate and your payment will always be the same. The nice thing here is that regardless of what is happening in the economy around us, you’ll have security in knowing exactly what your next mortgage payment will be.
Budgeting becomes easier
This makes it much easier to budget as well. If you know precisely how much your mortgage payment will be over the next 30 years (assuming you take a 30-year mortgage), then you can plan pretty far ahead with your finances.
It can be difficult to refinance
On the downside, fixed-rate mortgages can be a pain to refinance if and when rates do drop. Unlike an ARM, you’ll have to go through the process of having your home reappraised and qualify for a new loan at a new rate before you can take advantage of lower global rates.
Not only does this cause a headache, but it can cost a significant amount of money. I just recently moved and it cost me thousands of dollars just to close the loan.
Adjustable rate mortgages
Your rate will be lower at the beginning of the loan
An adjustable rate mortgage has plenty of benefits for the right people. First and foremost, your rate and payment will be much lower at the beginning of the loan. This has so many benefits. If you’re saving money on your mortgage payment, even if it’s just for five years, that’s still five years you can put that extra money toward something else—like a college savings account or a retirement investment account.
Rates are unpredictable
There are also significant downsides to an adjustable rate mortgage. The future rates are completely unpredictable. While rates have hovered around the same four to six percent over the past decade, it wasn’t long ago that rates were in the double digits.
Which one is better?
Well it seems like fixed-rate mortgages are better, right?
The actual answer is it basically depends. Everyone has unique needs and each mortgage type benefits a different type of person.
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