3 advantages of fixed rate loans over adjustable rate mortgages

When you apply for a mortgage, you have the choice of a fixed rate loan or an adjustable rate loan. In most cases, variable rate mortgages, or ARMs, have lower starting interest rates. This means that they come with more affordable payments and may be easier to qualify.

But while they can appear attractive, appearances can be deceptive. Fixed rate loans are almost always the best option – and these three big advantages reveal why a fixed rate loan is probably the way to go.

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1. You will know the loan costs in advance

A fixed rate mortgage, unsurprisingly, has a fixed interest rate. That won’t change over the life of your loan, whether you choose a 30-year loan, a 15-year loan, or some other repayment schedule.

You will know up front what your principal balance is (how much you are borrowing) and your interest rate. This way, you’ll know exactly how much your mortgage will cost you over the life of its repayment. There won’t be any surprises in how much you’ll spend on your loan payments – and you can decide if the purchase price makes sense to you.

On the other hand, the interest rate on a variable rate mortgage, as the name suggests, eventually adjusts. The original rate offered to you will only be blocked for a limited time (for example, five years with an ARM 5/1 or seven years with an ARM 7/1). Since the rate can change, your loan costs can change. This gives you much less predictability since it is impossible to know up front whether or by how much rates will increase.

2. You avoid the risk of increasing your payment

As mentioned above, your interest rate may increase on an ARM but not on a fixed rate loan. If your rate goes up, it’s not just the total cost of your loan that will become more expensive. Since your repayment schedule will not change but you will owe more interest, you will have to pay more each month to pay off your loan balance.

Rising rates can sometimes make your monthly payments much more expensive and in some cases make loan payments unaffordable. You might not want to take this risk, and you won’t have to worry about this problem if you choose a fixed rate loan.

3. You won’t have to worry about refinancing before your rate changes.

Most people who get an ARM plan to relocate or refinance before their rates start to adjust upward and they face the unpredictability of not knowing what their mortgage payment will be from year to year. other.

The problem is, it’s not always possible to refinance whenever you want. Property values ​​may have dropped since you bought your home and your home may not be worth enough. Or your income or credit score may have changed, so you may not be eligible for refinancing. Or the rates may end up being much higher than they were when you originally applied for a loan. And in that case, refinancing could make your housing costs much higher.

If you don’t want to worry about facing higher payments or having to modify your loan by refinancing it, avoid an ARM. A predictable fixed rate loan can often be the best choice for your portfolio and your peace of mind.

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About Brandon A. Hood

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