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Fixed Rate Mortgage or Variable Rate Mortgage?

Posted on 5th May 2012 by Mark Stern

 

 

If you are a homebuyer, you will have to decide which type of mortgage is right for you. The most popular and dominating interest rates that are being considered today is fixed rate mortgage and variable rate mortgage. As you choose the interest rate type, you should reflect on using it based on your personal criteria and your goal.

 

There are so many things to consider in choosing between the two types of mortgage. Variable Rate Mortgage, or the Adjustable Rate Mortgage (ARM) is a loan that you will pay in interest rate on the amount of loan. It changes based on a specific indexes that your lender will choose. Lower payments every month are offered in the beginning, and then your monthly payment will be higher or may be lower according to the interest rate of the index of that time. The period of adjustment of the interest rate can be concluded between you and your lender. Nonetheless, the adjustable rates usually change based on the period, such as six months, one year, five years, or even more than six years.

 

Variable rate mortgage can be chosen if there are interest rates that are unpredictable since fixed rate is difficult to obtain. If you are prepared to risk for the probability of the increasing interest rate or you are rewarded by lower rate at first, it is a good choice for you. However, you should not forget that the interest rates often change. They may go up and your payment will be higher than what you have discussed originally.

 

A fixed rate mortgage is a loan in which the interest rate is remained the same for the entire period of the loan. But then, unlike the variable rate mortgage, the initial interest in the fixed rate mortgage is usually higher. As it provides stable monthly payment, it is a good choice for you if you have your fixed budget each month. You should consider the terms that include interest rates, fees, and monthly payments. The fixed rate mortgage is simpler than the ARM, but you should also consider the margin, interest rate, or any fees that may be included in your payment to the lender.

 

With both the fixed and variable rate mortgages, you must compare other terms like penalties for pre-payment or due on clauses of sale. Pre-payment penalties are the fees that will be paid to your lender for paying the mortgage before the period of the loan is done. The lender will be earning if you pay the interest for the entire period of the loan ahead of time or when you fully paid the loan. The due on clauses of sale basically states that you should pay off the whole loan if the lender will sell the mortgaged property. It may not or may be included in your settlement with your lender. It can be done for both the fixed and variable rate mortgage so you should consider all the aspects of your mortgage. That will help you save the costs of selecting a mortgage considering your personal situation.

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