Unless money is of no concern to you when buying a home, choosing between adjustable rate mortgages and one with fixed rates is a very serious decision. Besides the fact that buying a home in general is a big financial decision, there are risks associated with both. Some of those risks are inherited early on in home ownership while others won’t rear their ugly head till later in the mortgage process. It is also a decision which requires forethought deep into the later years of your life. That can be a very ambiguous and difficult decision to make. Here are some reasons why you might choose type of mortgage over the other.
- Fixed rate mortgages have a set month to month payment plan that will never change for the life of the loan. The advantage is that the borrower is protected from a sudden and potentially unaffordable increase in monthly mortgage payments if the interest rates go up.
- The disadvantage of fixed rate mortgages is that the initial down payment can be up to 35% of the principal value of the home. This can make many homes unaffordable when interest rates are high.
- Adjustable rate mortgages have the advantage of a low down payment and cheap month to month payments during the first few years of the loan.
- The disadvantage and risk is that after a few years the month to month payments will adjust upwards reflecting high interest rates making the loan no longer affordable.
Let’s Start With A Fixed Rate Mortgage Plan
When the housing market is good and interest rates are low, finding the lowest fixed rate mortgage available is good advice. It is also a solid investment if you plan on keeping the home for a long time and eventually paying off the mortgage in its entirety. When the housing market was stable and people were staying in the same neighborhood for many years, a fixed rate mortgage was desirable because of its stability. You could count on the value of your home staying the same or increasing in value over time. However in areas where property values fluctuate, if you have a fixed rate mortgage and the value of your house decreases, you might be stuck paying a mortgage that is more expensive than the value of your home.
Tell Me About Adjustable Rate Mortgages
People often choose adjustable rate mortgages if they don’t believe they will eventually pay off the entire loan. Sometimes people look at an adjustable rate mortgage as a chance to flip a home, save some money over a few years and maybe find a better mortgage later on when times are better. You won’t have to spend as much money initially to get a home, you can even accomplish bad credit mortgage refinancing, and the first few years of home ownership will be light on your pockets. The monthly payments will be low. However the great risk is that after 3, 5, or 7 years the monthly payments increase to a price margin you can no longer afford and you have to default on a loan ruining you credit. Many people assume they can switch from an adjustable rate to a fixed rate when this happens, but it is not very easy.
Learn more about fixed rate mortgage refinance as well as the benefits of adjustable mortgage rates at www.real-estate-yogi.com. They are experts in the industry and can help you make the right decision. Call them for a free consultation any time at 1-800-987-1397.