Fixed-Rate or Adjustable-Rate Home Loan

Home loans are as different as the people they’re written for. Home buyers may choose between the most common forms of home loans – fixed-rate or adjustable-rate loans. If you’re unsure of what these terms mean, these tips may help you decide which is right for you.

Fixed-Rate Loans

Fixed-rate loans are written with an interest rate that does not change over time. It doesn’t matter if your loan is brand new or if you’re about to pay it off. The interest rate will not change.

Initially, you’re paying very little principal with each monthly payment. Most of the payment will go toward interest. Over time the amount you pay toward principal and interest will change as you pay down the interest at the front of the loan.

However, choosing a fixed-rate loan does not mean you’re limited to paying “just” your regular payment. You may choose to pay an additional amount, noted as going toward principal, with each payment or send a second separate payment during the month that would be applied entirely toward the principal.

This type of mortgage is great for people who don’t like to take risks with their finances, or who like to plan ahead. You will know exactly what your payment is each month and can budget for it accordingly.

Adjustable-Rate Loans

The adjustable-rate mortgage (ARM) loan, however, is exactly what it says it is. The interest rate you pay for your mortgage will change periodically based on the financial index. Ultimately, this means your payments may increase or decrease dramatically based on what the market is doing.

Of course, you still have the option to make additional partial or full payments with this type of loan. If you specify that any extra payment goes directly to principal, you could still pay off your home earlier. Unfortunately, if the interest rates change and that part of your payment increases, any extra you’ve paid toward principal may not matter.

This type of mortgage is good for home buyers who are prepared to take some risk in order to receive a lower interest rate. During the initial part of the loan, you will have lower monthly payments that can allow you to use your money elsewhere.

Some lenders will write a mortgage with an initial fixed-rate and then switch to an adjustable-rate. The length of the fixed-rate period may be as short as 6 months or could last as long as 10 years. If you know you’re not going to stay in your home longer than 5 years, this might be an option to consider.

If you do choose to go with an ARM, you may want to set aside money in a savings account so you’ll be prepared rather than shocked when your payments increase. Of course, the reverse is also true; if your payments are reduced, you would probably want to continue paying the same payment stipulating that the extra go toward principal. You may also choose to place any leftovers from the payment into an account for future changes.

Buying a home is an exciting and frustrating task but one that people embark upon every day. Your home loan is going to be different that your friend’s and family’s, but that doesn’t mean you have to go into the process without knowledge. Use these tips about fixed-rate and adjustable-rate loans to your advantage to get the best mortgage for you.