Learn the difference between a fixed-rate and adjustable-rate mortgage to make a sound decision about your housing loan.
Q: Should I choose a fixed-rate or adjustable-rate housing loan?
A: More often than not, purchasing a home entails applying for a housing loan, since not all buyers have enough money on hand to pay for it outright. The good thing is that borrowers have a lot of options to choose from regarding the type of institution to approach as well as the kind of loan to apply for. But more than these, they also have another thing to consider when settling for a loan: choosing between a fixed-rate mortgage and an adjustable-rate mortgage.
A fixed-rate mortgage is a type of home loan wherein the borrower does not experience a change in the loan’s interest rate. Basically, it stays the same throughout the term of the loan. One benefit to this is that budgeting becomes easier for you as a homeowner since you have a clear idea of exactly how much to set aside for monthly mortgage payments. Another is that should interest rates go up, you don’t have to worry, since their fixed interest rate won’t be affected. On the downside, this kind of mortgage usually comes with higher interest rates. Also, if interest rates go down because of positive market conditions, you can’t take advantage of lower payments.
As the name suggests, an adjustable-rate mortgage comes with an interest rate that tends to change throughout the duration of the loan. The best thing about this loan is that the interest rate is normally priced below market rate, which is advantageous for buyers who are starting out with a strict homebuying budget. Your loan’s interest rate will also decrease in the event that the market interest rates go down. However, this also means that a sudden upsurge in market interest rates will mean you have to pay higher rates as well.
Choosing between a fixed-rate and adjustable-rate mortgage will depend largely on your current financial situation as well as what the future has in store for you. An adjustable-rate mortgage would be a good option for investors looking to rent out the purchased property, since your tenant will basically be helping you pay for your mortgage every month. But if you’re someone seeking a sense of security or stability as a homeowner, you could be better off with a fixed-rate mortgage.
Note: Although careful research has been done for this article, consumers are advised to always consult with professionals.
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