What Rate is Best for Your Home Loan

 Fixed Rate Or Adjustable Rate Home Loan

Home loans are as different as the people they are written for. Homebuyers may choose between the most common forms of the home loans-fixed rate or adjustable rate loans. If you’re unsure of what these terms mean, these tips may help you decide which is right for your situation.

Fixed Rate Loan

Fixed rate loans are written with an interest rate that does not ever change over the life of the loan. Your principal and interest payment will never change. The fixed rate mortgage works best for people who are conservative with their finances. Its very easy to plan ahead because you know exactly what your payment will be each month and budget for it accordingly.

However, choosing a fixed rate loan does not mean that you’re limited to paying just your regular payment. You may choose to pay an additional amount every month, which will go directly to reducing the principal balance of your loan. This is an excellent idea because even a small additional payment made on a regular basis can reduce the term of your loan by years.

For example, on a $200,000 mortgage payable over 30 years at a rate of 6%, the monthly principal and interest payment is $1,199.10. An additional payment of only $50.00 per month would reduce the term to twenty-seven years-a savings of $43,167 at a cost of only $16,200. A larger additional payment would reduce the mortgage term even more.

The borrower may make an additional monthly payment of any amount-the only requirement is that the minimum monthly payment must always be made.

Adjustable Rate Loans
The adjustable rate mortgage (ARM) is exactly what it says. The interest rate on the mortgage will change periodically at pre-determined intervals. The change will be based on financial indices. A one-year adjustable rate mortgage will change once a year, a three-year will change every three years and a five-year will change every five years. Rate change intervals can be as short as every month or as long as ten years.

Ultimately, what this means is that your monthly payment can increase or decrease during the term of your loan.

Just as with a fixed rate loan, you may choose to make additional payments toward the principal whenever you choose and thereby reduce the term of your mortgage. This is a particularly good idea with ARM loans because if the interest rate goes up and you’ve made additional payments to reduce your principal, your new payment will not be as high as if you had not reduced your principal.

The adjustable rate mortgage is a good tool to use if you’re planning to stay in your home for a determinable time period. If your plan is to move from your current home in three years, a three year ARM might be advisable because your rate will be lower than a thirty year fixed rate loan and it won’t change for three years, at which time you’re going to move anyway. If you do select an ARM, you must be prepared for the eventuality that your rate may increase.

Hybrid ARMS
A relatively new product is the hybrid ARM, where the loan carries an initial fixed rate for a specified period of time and then switches to an ARM which adjusts at shorter terms. An example of this product is a 5/1 ARM. The initial interest rate is fixed for the first five years and then becomes a one-year adjustable rate mortgage. The advantage of the hybrid ARM is that the initial interest rate is still lower then a comparable fixed rate mortgage.