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April 22, 2013Which is the better option for you, an adjustable rate mortgage or a fixed rate mortgage? This is often the most common dilemma that the first time home-buyers face while taking out a home mortgage loan. Buying a home is certainly an intimidating and daunting responsibility and if you don’t take watchful steps while taking the decision, you might land up with a loan that may be tough to bear throughout its term. Inability to make timely payments on your mortgage loan will lead to a forced foreclosure of your collateral, which is most often your house. Who would want to take a risky decision and then lose his home to the bank? Bet you wouldn’t! There is a plethora of mortgage options that are available in the market but unless you make the required calculations and compare rates with the help of a home mortgage calculator, you might as well end up with the wrong loan. If you too are someone who is facing the above mentioned dilemma, that of choosing an adjustable rate mortgage or a fixed rate mortgage, read on the concerns of this article.
The adjustable rate mortgages – All that glitters is not gold!
Well, yes, just as the proverb says, ‘all that glitters is not gold’, similarly, the initial low rates of the adjustable rate mortgage doesn’t always mean that they’re the best options for a first time home-buyer. Check out the advantages and disadvantages of such loan programs.
The advantages:
- Initially, such loans offer lower rates and payments and as the lenders offer such low rates, the borrowers are able to buy larger homes than they otherwise could have borrowed.
- Helps the first time home-buyers save and invest more dollars. Someone who can save $100 through an ARM can earn more money off it through a high-yielding investment.
- Allows the borrowers to reap the benefits of falling mortgage interest rates even without refinancing their loans. Instead of having to pay a whole new set of closing costs on a new loan, ARM borrowers can just sit back and witness a fall in their monthly installments.
- Perhaps this is the best option for all the borrowers who don’t plan to stay in the same house for a long span of time.
The disadvantages:
- The interest rates and payments may rise significantly over the term of the loan, according to the completion of the teaser rate and according to the movements in the market. An ARM at 6% can end up at 12% in just 3 years.
- The ARMs are often tough to comprehend by the buyers as the lenders are much more flexible when assessing margins, adjustment indexes and caps. The unsophisticated borrowers could hence fall into the trap of shady lenders.
The fixed rate mortgages – A blessing in disguise!
Yes, all those who refinance their mortgages are mostly refinancing from an ARM to an FRM or a fixed rate mortgage. What may be the reason behind this? Check out the advantages and disadvantages of this kind.
The advantages:
- The interest rates and the payments remain constant throughout the term of the mortgage loan. You won’t be surprised by any kind of inflationary changes even when the market rates head upward to 20%.
- Stability of the monthly payments makes budgeting simpler and a first time home-buyer can simply keep aside the scheduled monthly mortgage installments, without anticipating any kind of rate hikes.
- As there is no fluctuation of interest rates, it is easy to understand for the novice home-buyers.
The disadvantages:
- In order to reap the benefits of plummeting rates, the borrowers require refinancing their mortgage, unlike an adjustable rate mortgage borrower. This means that you have to pay a lump sum on the closing costs and other fees, if you wish to take advantage of the market rates.
- This option might be too expensive for some borrowers, especially in those areas where the interest rates are pretty high on the fixed rate mortgage loans.
Thus, if your thoughts are oscillating between an adjustable rate mortgage and a fixed rate mortgage, you may take into account the above mentioned advantages and disadvantages. Assess your present financial condition and determine which option will best suit your needs and budget. Take help of a mortgage calculator to take firm decisions.
