Differentiating Between a Fixed Mortgage Rate and an Adjustable Mortgage
A home purchase is probably one of the most critical investments you will ever have to make in your whole life. When you decide to apply for a home mortgage that will help you secure the home of your dreams, the next important step would be to decide between a fixed and an adjustable rate mortgage type. Knowing the difference between the two can save you significantly or also cost you more depending on different situations. The following is an overview of the two so you could make an informed decision.
First and foremost, you must familiarize yourself with the bank language used. In other words, you should read the terms and conditions and read and reread the loan contract so you don’t end up making a costly decision. Never append your signature on an agreement that you don’t fully understand. A fixed rate mortgage is one whose payments remain constant for the entire tenure of the contract. These types of mortgages will normally attract a low interest rate, which is always secured for a very short period of time. The interest rate is normally calculated based on the rate and period for which the loan will last. As the name would suggest therefore, the monthly payments you make will never vary from day one to day last. A fixed rate type of mortgage is ideal for people who are not so good at dealing with change.
The only similarity between a fixed and a variable rate type of mortgage is the amount of interest payable. Basically, the rate of interest is always the lowest for the shortest terms. You can find a variable interest rate set up for 1, 2 or 3-year intervals. Interest rates for a variable rate mortgage are determined by the economy and if taken at the right time, can save you a huge sum of money in the end. On the flip side of the coin, they can end up costing you a lot than you could have ever imagined. It is much of a gamble really.
This is where the problem lies with a variable rate mortgage – there is no guaranteed amount to be paid. The only positive thing about this type of mortgage is the limit set on increases and decreases in the payments you end up making. In other words, a payment is only allowed to rise up to, or fall down to a certain figure with each new term. If you are buying your house then sell after a few years, you might want to consider a variable rate mortgage which you can then take advantage of the low introductory rate.
If you however plan to remain in the same property for as long as you can imagine, a fixed rate mortgage could be advantageous. With that being said, you have to be sure your income can handle a rise or fall in payments; else you are better off with a fixed rate mortgage.