Not all lenders are alike. Neither are
Shopping for a home loan takes real effort and research. Rather
than choosing the first low interest
rate that comes along in a Yellow Pages ad or web site, be sure to compare several
lenders and explore all your options. The more you explore the more you save.
Fixed-rate loans have one interest rate for the life of the loan, while variable rates can adjust within certain
perimeters outlined in the loan. Most fixed-rate loans are 30-year, but 15-year,
20-year or 25-year fixed-rate loans are available, too. Generally speaking, fixed
rate loans are the most predictable. Since your interest rate doesn't change, neither do your monthly payments.
Variable rate loans, on the other hand, are less predictable. You may start out with a low interest rate and payment, because most Adjustable
Rate Mortgages (ARMs)
offer an initial rate that is generally 2-3 percent below a comparable fixed rate
mortgage. Not only will your loan costs be lower; your purchasing power will be
higher because you may be able to qualify for a bigger loan with an ARM.
But after your initial period, your rate adjusts periodically which carries certain
It depends. Interest rates can be unpredictable. Fixed rate loans are most attractive when interest rates are low. That's when most homebuyers will simply lock-in
the current rate. When rates are high, more homebuyers purchase ARMs
in order to keep their monthly payments lower for the first few years. Sound confusing?
Don't be concerned, interest rates can go up and down but the rules of the game never change. Before picking
a variable rate over a fixed-rate loan, you need to review the pros and cons of
each, and then decide which type makes sense for your situation.
First, ask yourself these questions in deciding whether to choose
an ARM or a fixed interest rate loan:
If you plan on moving within
five years, an ARM could save you money in the short term. On the other hand, if you plan to own
it for longer and interest rates are currently reasonable, consider a fixed rate loan. It is more predictable.
If you choose an ARM,
how high can the monthly payment go? Ask yourself if you can pay that? Do you
anticipate a raise? Are you willing to take that gamble?
Will you be taking on other sizable debts, such as a car or
school tuition, in the near future? Although you can leverage a bigger home purchase
now with an ARM, don't put yourself in a bind later. You could be facing larger
home payments with less money left for other needs.
When comparing fixed and variable types of
loans, be sure to compare apples to apples. It is a common mistake to compare
dissimilar loans. Fixed-rate and variable-rate loans have drastically different
costs and payment structures. So you'll need to compare fixed rate loans with
other fixed-rate loans, not with variable-rate loans. Let's review the types.
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