Understanding mortgage loans: Fixed Rate vs. Adjustable Rate

Many people dream of buying a home of their own, and there are several reasons ranging from not having to pay more rental income, to the fact start building a family estate.

But very few can afford to buy a home, whether home or apartment, in cash, making it necessary to resort to mortgage lending.

Mortgages are long-term loans that are used exclusively for the purchase of real estate, the most common being those with 15 or 30 year term. And the cost of the loan depends on the interest rate can be fixed or adjustable.

These mortgages allow you to pay off the debt in equal monthly installments for a specific period of time ranging between 10 and 50 years term. The 30-year term is the most common.

Monthly fees are directed to pay interest first, and then the capital.

In the first years of the loan, most of your monthly payment goes to interest payments, whereas towards the end of the loan period most of your monthly installment focuses on paying the capital. This can be calculated and observed by an amortization table.

One of the most attractive advantages of fixed interest rate is the security of knowing that whatever happens, your monthly payments will not change until you finish paying the debt, and this even makes it easier to budget your living expenses.

If the interest rate on the mortgage market goes up or down, this at all affect the loan payments you have already acquired. And if the market rate drops considerably, you always have the option to refinance the loan at a lower interest rate.

And you can always make payments for amounts greater than your monthly installments, thus the additional amount can be credited to capital, and consequently will reduce debt faster and save on interest.

You should also consider that in some cases, lenders charge a penalty if you cancel in advance the entire debt within a certain period of time, usually within one to five years.

This type of mortgage is best known by its acronym as ARM (Adjustable Rate Mortgage), and as its name suggests the interest rate varies periodically during the period of the debt, and therefore, your monthly payments can lower or raise.

The interest rate that lenders charge for this type of mortgage is usually lower than that charged by fixed-rate mortgages, making this very attractive option. However, if you choose this option, you must assume the risk that the interest rate rise in the long term, and if this happens your monthly payments will also rise.

During the first years of the loan, usually 2, 3, or 5 years, the interest rate is fixed. Then comes into effect the adjustment period in which the interest rate changes according to an index and a margin determined by the lender. This change will be reflected in your new payment fees, which as mentioned may be higher or lower.

For example, a 5/1 ARM mortgage, the rate will remain fixed the first 5 years, then be readjusted each year until the debt is canceled in its entirety.

This type of mortgage is suitable for people who do not think to keep your home for a long time as they will take advantage of low interest rate during the period of fixed payments, and can sell the home before the interest starts to change.