What is the Difference Between Fixed and Adjustable Rate Mortgages?

There are various types of mortgage loans, all with different benefits and an equal set of limitations. A home buyer must make certain that he or she knows their liquidity, risk-bearing capacity, budget, type of property they want to buy and credit score before even looking at the types of loans available. Based on interest rates, there are two major types of loans: fixed and adjustable mortgages.

Below, we will take a closer look at the differences between these types of loans, as well as their advantages and disadvantages.

In the case of a fixed mortgage loan, the interest rate is fixed and the monthly payments remain the same throughout the life of that loan.

Pros:

• You’re protected against unusual spikes in the market.
• You also have a set payment, as opposed to other loans.

Cons:

• If the market rate falls, you may end up paying a very high rate.
• This type of home loan is not useful if you are moving out of, or planning to move out of your home since you will lose out on a lower interest rate.

In an adjustable mortgage loan, the interest rate remains fixed for the formative years of the loan and then begins and continues fluctuating for the latter years, subject to the prescribed rate.

Pros:

• Initial fixed payments usually have a lower rate of interest than a fixed mortgage loan program.
• If you are not planning to live in the house for a long period of time, you can sell the house and enjoy the benefits of a lower rate.

Cons:

• If the market rates vastly increase, it will result in a great loss in the loan, therefore, it is recommended for those buyers who have the leverage to absorb risks by fluctuating market rates.

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