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Although there are multiple types
of mortgages, the two most common mortgages are fixed rate
mortgages and adjustable rate mortgages (often referred to as ARMs). The obvious
difference is that the rate changes in the ARM, but each one has
an his advantages / disadvantages.
Fixed rate loans are ideal if you want
to lock into a low rate and stay in your home for a long period of time
or until its paid off. ARMs are a good idea if you are planning
on only staying in the home for a short period of time, where you can
take advantage of a lower interest rate.
Fixed Rate Mortgage Home Loans
Fixed Rate Mortgage home loans are set
to specific length of time, most commonly 10, 15, 20, 25 or 30 years,
where the interest rate is fixed and never changes. Since the
interest rate stays the same, these types of loans will usually have a
bit higher interest rate. If you plan to be in your home for a
long time, it's a good idea to lock into fixed rate loans when loan
rates are low. Since 2000, home loan interest rates have been
very low, prompting growth in the real estate market and a increase in
the number of home owners who have refinanced to fixed rate loans.
In a fixed rate loan, you can see that
the longer the term, the lower the payment. But with the lower
payment, you will pay more interest on your home before it is paid off.
30-year mortgages can be helpful in allowing home owners to purchase
homes they may not be able to afford with shorter terms, but in the end
home owners will cringe when they realize how much of their income they
have paid in interest. Lets look at some numbers on fixed
mortgages for $200,000 home at 6%.
15 year mortgage - Payment: $1687.71 -
Total Interest Paid: $103788.46
30 year mortgage - Payment: $1199.10 -
Total Interest Paid: $231676.38
In this
scenario, if the home owner could budget for an extra $488 a month,
they would benefit greatly to go
with the 15 year loan. Not only do you knock 15 years worth of
payments, you also save $127,888 in interest over the life of the home
mortgage.
Adjustable Rate Mortgage Home Loans
Adjustable
rate mortgages do not guarantee a fixed rate over the term of the loan,
but will generally offer a fixed rate for a period of time before the
rate will be adjusted. Generally, the ARM will be set to adjust
in a specific amount of time, maybe 1, 2, 3 or 5 years and then also
adjust one more time. a 5/2 ARM means that that the first adjustment is
in 2 years then a final adjustment to the rate is made in 5 years.
The benefit of the
adjustable rate
mortgage home loans is a reduction in interest rate. Since
lenders don't have control of interest rates, they can offer lower
rates if they know they can adjust the loan after a certain period.
But.. be careful, this almost always means that your rate will go up
and your payment will go up and the interest paid on the loan will go
up.
So why would anyone use an ARM?
Well, for one, it may be a matter of credit. People with poorer
credit can often times meet requirements for the ARM vs. the fixed rate
simply due to the lower payment. Also, ARMS cab be advantageous if you
know you will be only staying in the home for a few years. If you are purchasing a
home, but plan on building or buying another home in 3 years, then the
ARM is a perfect loan for keeping your interest lower during this 3
year period.
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