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Advantages And Disadvantages of Fixed-Rate Vs Adjustable-Rate Home Mortgages
A home is where the heart is. When you want to build your very own family, you will need a home of your own. However, owning a home is not as easy as it seems. Well, if you are very wealthy and have lots of money saved; owning a house will be easy because you can pay the total price of the house you want in cash. However, if you do not have enough money saved up yet, you can still purchase a house by financing it through a mortgage loan.

Mortgage loans are loans given by banks and other lending institutions so that people can afford to purchase a house. A mortgage loan is given when a bank allows a person to use the banks money so that the person can purchase the home that he/she wants. The bank releasing the loan will earn by adding interest on the total amount of cash value, known as the principal, borrowed by the person. The interest added to the loan will depend on the current economic indicators.

There are basically two types of home mortgages which a person can choose to purchase the first home or for a home refinance. These are the fixed-rate mortgage and the adjustable-rate mortgages. Each type of mortgage has its own advantages and disadvantages. You must understand the differences between these two types so that you can choose the best one that suits your needs.

The Fixed-Rate Home Mortgage. If you are having a hard time with budgeting your money; the fixed-rate home mortgage is ideal for you. Fixed-rate home mortgages which are offered by lending institutions are charged with a set rate of interest. This interest rate does not change throughout the term of the loan. The advantage of a fixed-rate home mortgage is that the total amount that you have to pay will remain the same. The payments that you will make in a fixed-rate mortgage consist primarily of interest payments during the initial years of the term. However, during the later part of the term, the payments that you make will go towards the reduction of your loan principal.

Another advantage with a fixed-rate mortgage, which is actually considered as the main advantage is: the person who takes the loan is protected from any sudden and potentially significant increase in monthly mortgage payments due to the rise of interest rates. Economies of even the most developed countries such as the US are very volatile and can change dramatically at any moment. This leads to inflation will cause an increase in the interest rates charged by banks on their loans. A fixed-rate mortgage protects a loan borrower from these changes. This means that whatever payments computed through a mortgage calculator will not change throughout the loans term.

The Adjustable-Rate Home Mortgage: An adjustable-rate home mortgage (ARM) has interest rates that keeps changing over time. At the start, the interest rate offered by ARM is lower than that offered by fixed-rate mortgages. However, this rate is only for a specific part of the total loan term. As the term progresses, the interest will keep on increasing until it surpasses the going rate for fixed-rate mortgages.

The interest rate of the ARM will remain constant only for a specific period. Once this period is over, the interest rates will be adjusted as per the pre-arranged frequency.

Adjusted-rate mortgages can be hard to understand because of the many factors affecting the adjustment of interest being charged on the loan. The adjustments of the interest rates depend on different adjustment indexes such as the interest rate on certificates of deposit, the treasury bills or the LIBOR rate. However, a person who plans to apply for an adjusted-rate mortgage to purchase a home may negotiate with the lending institution to apply caps and ceilings on the interest charges on the loan. Ceiling refers to the highest amount of interest that can be charged on the loan.

ARM is an ideal option for most people because they offer lower initial payments and allow them to qualify for larger loans. Not only that. In an economy with a falling interest rate, the person with an ARM will be able to enjoy lower interest rates as the loan term progresses. However, when interest rates rise due to poor economic indexers, a person may find himself paying a significantly higher monthly payment than what he bargained for.

Article by John Hoots of Chicago, who is a specialist in real estate investments. For more information on Chicago home loan, visit his site today.


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