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ARM or Fixed Rate Mortgages? Taking a Closer Look at The Differences

February 11, 2010 by Kevinmiller
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If you’re considering either a fixed rate or adjustable rate mortgage , what’s right for you? Let’s break it down:

Basically, fixed rate mortgages mean your monthly principal and interest payments will remain the same for the entire term of the loan, albeit at a bit of a higher rate. This allows you to more effectively plan your financial future, without having to worry about a change in payments down the road. You can plug in a set principal and interest payment each month, and start enjoying your home. You pay for security.

Adjustable rate mortgages (ARMs) laugh in the face of stability, but might just save you hefty sums of money if you’re willing to play the game. ARMs offer lower initial interest rates (often 1-2 percent lower), before elevating after a term pre-specified in your contract (based on rates and market factors at that time). ARMs might allow you to buy an expensive house you might not be able to otherwise, but they could also cause problems further down the road once rates adjust.

Ultimately, it’s just a matter of how much risk you are willing to take.

For example, a real estate expert at MSN did an experiment (before the recent housing collapse) examining how borrowers would have fared with each type of loan — fixed versus adjustable rate mortgage loans — in each of three very different interest-rate environments (1977-1983, when rates rose spectacularly; 1987-1993, when rates jumped before falling again; and 1997-2003, when rates bounced around before dropping sharply). Her findings?

No matter how many times we do this experiment, we wont be able to predict what will happen in the next seven years or the years after that. The past is no guarantee of the future. If you’re willing to roll the dice on an adjustable, be my guest — as long as you’ve done the math and know you’ll be able to swing the payments if rates climb.

Both types of mortgages come in all sorts of shapes and sizes, so you’ll need to do some thorough research to find out the exact plan that’s best for you. Contact our home loan mortgage experts , and we’ll help you learn everything you need to know.

 
 

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