Is a Variable Rate Home Mortgage Right for You?
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by: marciafreeman
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If you have been holding back on applying for a home mortgage, the recent drop in interest rates may mean that now is the time to act. If you are a first time home buyer, understanding the kinds of home mortgage available to you may be difficult. Here is an explanation of the two basic types of home mortgage, adjustable rate and fixed rate mortgages.
In a fixed rate mortgage, the interest rate and monthly payment amount never change, regardless of changes in federally set interest rates. Whatever rate you are given when you take out the loan, that is the rate you continue to pay until you refinance, sell the house, or pay off the home mortgage. Lenders usually charge marginally higher interest rates for fixed rate home mortgages as security against times when interest rates rise. This slightly higher interest rate is a premium you pay for the security of a fixed rate.
On the other hand, the interest rate for adjustable rate mortgages "adjusts" as national interest rates rise and fall. When the prime rate is high, your mortgage interest rate increases; when the prime rate is low, your mortgage rate drops. Your monthly payments rise and fall accordingly. Because banks take on less risk when they issue adjustable rate loans, they offer slightly lower interest rates for adjustable rate loans than for fixed rate loans. They also offer a grace period, typically 36 months to seven years, during which your interest rate does not fluctuate and is locked at an appealingly low rate.
Which one is best for you? Do not immediately be tempted by the lower interest rates of adjustable rate mortgages. The length of time you plan to live in your house is a factor. So is the possibility of interest rates rising or falling during your ownership. If interest rates are at a record high when you buy your house, taking out an adjustable rate mortgage is a sensible idea, since your rate is likely to improve. If you plan to resell your house within the grace period of an adjustable rate mortgage, then opting for an adjustable rate mortgage would be an economical way to get a low cost, short term loan. However, if you plan to stay in your house for a long time and national interest rates are low, then "locking in" a lower interest rate with a fixed rate mortgage may be your best move.
Take into account not only your own finances, but the current economic climate, when deciding what kind of home mortgage is right for you. Both kinds of home mortgage can offer you an excellent deal in the right economy. Find more Home loans Mortgage rates Loans
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