Adjustable and Fixed Mortgage Rates – Which one is better
When planning to purchase a home, potential buyers always consider getting help from mortgage lenders. Mortgage lenders consist of institutions or individuals who offer huge sums of money which can be repaid later in easy installments. But in exchange for the convenience offered by mortgage financing, a mortgage lender has to gain profit and this is through interest.
Mortgage rates therefore, matter to a potential home buyer. This should form part of a borrower’s plan because it can affect how much he needs to pay in the future. The rates on the mortgage loan determine the cost of borrowing funds from the date of its approval until the end of the loan’s term.
A borrower has two choices when it comes to the type of interest rate on the mortgage. He can choose an adjustable-mortgage rate or a fixed mortgage rate. The difference, advantages and shortfalls of each interest type should be clear to a borrower so he can make a better decision on which type of interest rate to take.
A mortgage with a fixed rate gives the borrower the benefit of knowing how much he needs to pay for the entirety of the loan. A fixed-rate mortgage loan can give a borrower peace of mind because he is fully aware how much money does he need to set aside for his obligation. In contrast, a loan with an adjustable mortgage rate does not give a borrower emotional security. This type of loan does not have a steady interest rate because it changes with the trend in mortgage rates. The borrower could be trapped and forced into bankruptcy if the interest rate on the loan unexpectedly rises. Most borrowers who have foreclosed properties in the United States comprise of those who have adjustable-rate mortgage loans.
A mortgage with a fixed rate also has its shortfalls. The first noticeable disadvantage of a fixed-rate mortgage is that it requires a good credit rating. To be able to reap the benefits of a fixed-rate loan, a borrower should have a credit rating that is acceptable or above-average. This is the reason why only a few borrowers can get fixed-rate mortgage loan.
Another shortcoming of a fixed-rate mortgage is its lack of flexibility. Continuous reduction in mortgage rates in the market cannot be enjoyed by borrowers because they are tied-up for a fixed rate. The only solution for this is to avail of refinancing but this is too costly especially if the mortgage loan has just been recently approved.