Will you be buying a home in the near future and need to decide on what kind of mortgage product you want to use? One question you're likely to have is what is the difference between a fixed rate and an adjustable rate mortgage. Here is what you need to know about these two mortgage products.
Fixed Rate Mortgage
A fixed rate mortgage is what you typically think of when you see a 15 or 30 year mortgage. The interest rate is locked for the entire duration of the loan, and will never change on you. However, this means that you cannot take advantage of lower interest rates if the rates continue to drop over time. The only way to do this is to refinance your home, which involves starting the mortgage over and paying additional fees to essentially get a new mortgage.
A fixed rate mortgage keeps your mortgage payments low and predictable. Even though it is at a higher interest rate than an adjustable rate mortgage, know that the length of a 30 year mortgage can keep your payments lower than what they would be with another mortgage product. This can make it easy to pay off your mortgage gradually and give you peace of mind.
Adjustable Rate Mortgage
It is common for adjustable rate mortgage to have a very low introductory rate, which makes the mortgage very appealing. However, the big difference is that the interest rate can change over time. That introductory period typically has the rate locked for a specific amount of time where the rate will not change, and then the adjustment periods begin.
Each adjustable rate mortgage is different when it comes to when the rates are allowed to change. This could be every month or it could be every year. This all depends on the terms of your loan. There are also maximum and minimum interest rates as part of the mortgage, so you know where interest rates can potentially go over time.
Many people that get an adjustable rate mortgage do so with the knowledge that they are going to sell their home in the near future. They may know that they'll be in the home for less than the introductory rate period, so they will never have to deal with the adjustable rate period. Of course, you run the risk of being in the home longer than anticipated and paying the higher interest rate, but that's all part of the risk and reward of using an adjustable rate mortgage.
For more information about home financing services, contact a company like FNCB Bank.