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Fixed Rate Mortgage
FIXED RATE MORTGAGE
The most important factor in determining whether to choose the variable or the fixed rate is the lifestyle and the financial capability of the borrower.
A borrower with a fixed rate doesn’t have to worry if the interest rates increase because with this kind of mortgage, interest rates will remain the same for a prearranged set of time. Also called the conventional mortgage, this home is for the budget conscious borrower. The knowledge that the amount of monthly payments will remain the same in the face of economic and political upheavals will give peace of mind to a borrower.
Because of the predictable payments of a fixed rate mortgage, the borrower can have a stable financial plan. Present interests are low but economists have predicted interest rates to soar in the coming years. A high five for the borrower with a fixed rate mortgage!
As with the fixed rate mortgage, a variable rate may have a fixed payment but for a shorter duration. The big difference is that if the interest rate goes up, your payment tends to also go up within set intervals. If you get stressed by the fluctuation of the interest rates and you lose sleep worrying about its effect on your monthly budget, then variable rate is not for you. Variable rate however, has become so popular to borrowers with gambling tendencies. They cross their fingers and hope that the rate will become stable.
The interest rate of a variable or adjustable rate (ARM) depends on an index. If the index rises, the rate rises too and consequently if the index falls, so does the interest rate. Of course there is a cap that prevents the interest rate from fluctuating too much. To ensure profit in this
type of mortgage, the lender passes the risk of increased interest rate to the borrower.
Variable rate mortgages do have some benefits too. If the interest rates drop, the borrower will reap the benefit of lower monthly payments. Another benefit of the variable interest is that some programs offer a fixed rate for the first five or ten years, the interest rate is usually lower than that of the fixed rate mortgage.
If the family plans to live in the house for a short time, then the adjustable rate may be for you. You can take advantage of the lower interest rate that is offered on the initial five to ten years. But if you plan to live in the house for a long time, then the fixed interest is for you.
If you have plans of borrowing against your equity in the future to finance home improvements, for college education and for any unexpected expenses, you may wish to opt for the lower rate variable now. Refinancing is always an option for borrowers who would need cash in the future but the choice between variable or fixed rate could save the borrower from unnecessary costs.
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