What You Should Know About Mortgage Loans

02/20/09

There are two broad categories of mortgage loans fixed rate mortgages and adjustable rate mortgages although there may be several different types available. Deciding which type of mortgage loan to apply for will depend on your particular set of circumstances and how much risk you are willing to incur. Below we outline some of the advantages and disadvantages of both types of mortgage loans and a few ideas on how to choose the mortgage loan that is right for you.

Fixed Rate Mortgages

On the whole, fixed rate mortgages tend to offer more security and stability for the home buyer. Fixed rate mortgage loans provide a clear picture of how much you can expect to pay each month because the interest rate is fixed for the duration of the loan. Therefore, you will be paying the same monthly principal and interest rates during the entire period of the mortgage. While some adjustable rate mortgages have an introductory period during which the interest rate is fixed, a true fixed rate mortgage has one interest rate for the entire term of the mortgage loan.

A distinct drawback of fixed rate mortgages is that the interest rates associated with them are generally higher than with adjustable rate mortgages. In general, the longer the term of your mortgage loan, the larger the premium between a fixed and adjustable rate mortgage. If the mortgage borrower plans to stay in their house for many years and believes that interest rates may go up, then the premium today could be a substantial savings tomorrow.

Adjustable rate mortgages (ARMs) Adjustable rate mortgages do offer lower interest rates at the outset, but interest rates and payments will likely change in the future. With adjustable rate mortgages, the interest rates are dependent on general interest rates or what is known as an index. Many adjustable rate mortgages are considered 'hybrid mortgages' and have a fixed introductory period of 1, 3, 5 or 7 years during which time the interest rate does not change. Many other types of ARMs typically have shorter interest rate adjustment periods however. These types of hybrid adjustable rate mortgages may be better options for you if you only intend to stay in your home for a few years. It's always important to keep in mind, however, that payments on adjustable rate mortgages could increase when the interest rate resets. Most ARMs have a limit on how high the interest rate can rise during any one adjustment period.

Choosing the right mortgage loan for you How do you make a decision on which types of mortgage loans to go for? As we said earlier, it all depends on the risk that you are willing to take as well as your particular circumstances. Fixed rate mortgages are generally a safer option simply because you know how much you will have to pay each month. Adjustable rate mortgages on the other hand may be less expensive initially, but carry more risk. In any case, careful comparison shopping will help you decide which mortgage loan will best suit your needs.

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