Adjustable Versus Fixed Rate Mortgages

If you are about to purchase a home or are considering the possibility of refinancing your home loan, you should be sure to get the right type of home loan for you. If you get the wrong kind of mortgage, you could lose thousands of dollars in interest and potentially even lose your house! Here are some things that you should consider when picking out a type of mortgage loan that is best for your financial situation.

There are two categories of home loans that will be available to you when it comes to the interest rate of the mortgage. They will be either fixed rates or variable. Adjustable interest rate (ARM) mortgages come with a slightly lower interest rate, but have so much more risk that they generally are not a good idea. If interest rates skyrocket, you are stuck paying thousands more in interest, and the interest gets so high that you cannot afford to make your mortgage payment, you lose your home. Get a fixed rate mortgage regardless of your financial situation to avoid any interest rate surprises.

Next you will want to figure out what the term of the mortgage that you want to get. How long you refinance your loan for will determine how much your monthly payment is. A general rule of thumb is that the longer you borrow the money for, the lower the amount of payments you will have. You should also consider though that the longer you borrow money, the more interest you will pay. You will easily pay two and half times the interest with a 30 year mortgage compared to a 15 year mortgage, so try to pay off your home in as short of a period as possible.

Don’t get your mortgage to be too short that the payment is astronomical and there is no way you could possibly pay the payment. Avoid having monthly payment that is more than 25-30% of your monthly take home pay. If it’s any more than that you will start to get in a realm that so much of your money is going to your mortgage that you begin to be unable to afford to do other necessary things.

There are just some types of mortgage which everyone should avoid. Interest only loans are a really bad way to go because you will be in debt forever. Often times these interest only mortgages have adjustable rates which are also to be avoided. You might hear a lot of other creative ways to finance a home, but usually they are bad for the consumer. Get a fully amortizing fixed rate loan over a period that you can afford that is a reasonable percentage of your take-home pay to get the right mortgage for you.